How to write off bad debt correctly
When a receivable becomes uncollectible, leaving it on the books overstates your assets. Here is when and how to write it off cleanly.
Why you have to write off bad debt
An invoice that will never be paid is not really an asset. Carrying uncollectible receivables inflates AR and overstates the income you already recognized. Writing off bad debt removes the fiction and records the loss where it belongs. The question is not whether to write it off, but which method and when.
Allowance versus direct write-off
| Method | How it works | Best for |
|---|---|---|
| Allowance | Estimate expected losses up front in a contra-asset account | Accrual books, matching principle, GAAP |
| Direct write-off | Expense the specific invoice only when it goes bad | Small or cash-basis books, immaterial amounts |
The allowance method matches the expected loss to the period the revenue was earned, which is why it is the GAAP approach. The direct method is simpler but records the loss later, only when a specific invoice is deemed uncollectible.
The journal entries
- Allowance setup: debit bad-debt expense, credit allowance for doubtful accounts, based on an estimate.
- Allowance write-off: debit the allowance, credit accounts receivable for the specific bad invoice.
- Direct write-off: debit bad-debt expense, credit accounts receivable directly.
- Recovery: if a written-off amount is later paid, reverse the write-off and record the cash.
How Fintra tracks bad debt
- AR aging surfaces the overdue invoices that are write-off candidates.
- Collections automation shows what has been attempted before you write an invoice off.
- Write-off entries post to the ledger with a clear reason and audit trail.
- Recoveries are recorded against the original invoice so the history stays intact.
Frequently asked questions
What is the difference between the allowance and direct write-off methods?
The allowance method estimates expected bad debt up front in a contra-asset account, matching the loss to the period revenue was earned - the GAAP approach. The direct write-off method expenses a specific invoice only when it becomes uncollectible, which is simpler but records the loss later.
When should I write off a receivable?
After reasonable collection efforts have failed and the invoice is well past due with no realistic prospect of payment - for example a customer that has gone out of business. Reviewing your AR aging each close keeps write-offs timely so dead receivables do not inflate your assets.
What happens if a written-off invoice is later paid?
You record a recovery: reverse the write-off to reinstate the receivable and then record the cash received, or simply record the cash against a bad-debt recovery account. Either way the payment is captured, and the original write-off history remains for the audit trail.
Is bad debt tax-deductible?
In many jurisdictions a genuinely uncollectible business debt can be deducted, but the rules and timing vary and depend on your accounting method. Because deductibility hinges on specifics, confirm the treatment with your tax advisor rather than assuming a write-off automatically reduces taxable income.
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