What is the time frame allowed before an accounts receivable (AR) item is considered bad debt?

An accounts receivable (AR) item is typically considered bad debt after a certain period of inactivity, reflecting a company's assessment of collectability. In many accounting practices, an AR item is classified as bad debt at the end of the fourth month, which is approximately 90 days. This timeframe is utilized as a standard practice to recognize when a debt may no longer be collectible and needs to be written off as a loss.

The rationale behind considering an account as bad debt after this period often stems from the acknowledgment that if payments have not been received within about three months, there is a significant chance that the customer may be unable to fulfill their obligation. Therefore, writing off bad debts at or after this 90-day mark helps reflect a more accurate picture of the company's financial health and ensures that financial statements are not overstated with uncollectible amounts.

In contrast, options that suggest shorter periods, like 30 days or 60 days, do not accurately reflect the standard timeframe generally accepted in accounting practice for recognizing bad debts, as many companies will allow for a longer collection period to attempt recovery. The option indicating 120 days, while it recognizes that debts can remain uncollectible beyond 90 days, is beyond the typical timeframe when debts are classified as