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Bad debt means the amount which you are supposed to receive from your customer which you cannot recover anymore. Reasons may be the customer may have gone bankrupt or did not make payment for any other reason.
There is no standard formula to calculate bad debt. In general provision will created each year by the companies with some previous experience which helps in estimating how much would become default. This rate defers from industry to industry. Also depands on inernal control of the orgnaization. More the knowldge you have about your industry and clientell less are the chances of bad debts. But, to be prudent in accounting and estimate certain percentage of bad debts will be calculated and provided. This will be adjusted with the actual bad debts occured at the end of each financial year.
If there was excess provision remaining amount will be reversed and if the bad debts actually occured is more than estimate further provision to will be created to adjust the actuals.
Hope it was useful.
It means that , Your money fly away , not collected and will never be. regardless the reasons.
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