Doubtful debts refer to the portion of a company's accounts receivable balance that it estimates may not be fully collectible from customers, reflecting the possibility that the amounts due might turn into bad debts. It is part of prudent accounting practice to recognize that not all sales recorded will translate into actual cash received, especially in credit sales.

For example, a company may have $100,000 in sales invoices outstanding but, from past experiences, deems $5,000 of that amount as uncertain to be paid due to the creditworthiness of certain customers or disputes over payments. This $5,000 would be classified as doubtful debts, and the company might set up an Allowance for Doubtful Debts in its financial statements to account for this anticipated loss.

By creating this allocation, businesses can better align their financial records to reflect a more accurate financial position, ensuring that their profit figures are not overstated. This also assists in the process of year-end audits and reconciliation of accounts receivable. Terms related to doubtful debts include Bad Debt, Accounts Receivable, and Allowance for Doubtful Debts.