A more elaborate explanation of this subject can be found here, on The SpongeBob SquarePants Wiki.

Bikini Bottom is a city located at the bottom of the Pacific Ocean and home to most of the characters of SpongeBob SquarePants. It was formerly known under different names, first Bikini Bikini Bottomshire and later Dead Eye Gulch. ☀one theory states Bikini Bottom is a wasteland after a missile testing.