Bad debts have the effect of reducing assets and reducing profits, which results in a reduction of equity.

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This is because bad debts represent a loss that cannot be recovered and therefore reduces the amount of assets that can be collected from debtors. This reduction in assets also results in a reduction of profits, as revenues cannot be earned from bad debts. Ultimately, this decrease in profits leads to a reduction in equity, which represents the owner's stake in the company.

Bad Debts Have the Effect of Reducing Assets and Reducing