What is considered bad debt in business accounting?

In business accounting, bad debt specifically refers to accounts receivable that are not expected to be collected. This typically occurs when a customer who owes money becomes unable to fulfill their payment obligations, often due to financial difficulties. As a result, businesses have to recognize that certain debts are uncollectible and can deduct these amounts from their income, reflecting a more accurate financial position.

When a business identifies an account as uncollectible, it adjusts its accounting records accordingly. This adjustment is necessary to provide stakeholders, such as investors and management, with a truthful representation of the company's financial health. Deducting uncollectible accounts receivable from income accurately lowers the revenue figures, ensuring that the financial statements do not overstate the company's earnings.

In contrast, the other options presented involve different financial issues. Assets sold for less than their value may incur a loss, but this is not classified as bad debt. Excess inventory that cannot be sold deals with inventory management and valuation rather than accounts receivable. Employee wages that cannot be paid relate to payroll obligations but do not fall under the definition of bad debt since they do not involve uncollectible money owed by customers. Therefore, the focus on accounts receivable confirms that the correct selection identifies uncollectible accounts as the