You sent the invoice 6 months ago. You've followed up twice. You've called once. No response. At some point, you stop treating that $2,400 as money you'll collect.
Good accounts receivable management means knowing when a receivable is gone for good. It also means recording that correctly. Done right, a write-off is a clean, one-entry process. Done wrong, it distorts your balance sheet.
This article covers both write-off methods. You'll get illustrative journal entries for each. There's a GAAP note for accrual books. And a high-level tax note — your CPA handles the return.
What is a bad debt write-off?
A bad debt write-off removes an uncollectible AR balance from your books. You stop treating it as an asset. You record it as an expense. Two methods exist. The direct write-off method removes the AR when you confirm it won't be paid. The allowance method estimates bad debt each period and sets aside a contra-asset reserve. Most accrual-basis businesses use the allowance method for GAAP. Common trigger: an invoice 90 to 180 days past due. You've made at least 3 collection attempts. No response.
Key Takeaways
- Two write-off methods - direct write-off and allowance. Accrual books use the allowance method for GAAP. Cash-basis books often use direct write-off.
- 90 to 180 days past due - the typical threshold for calling an invoice uncollectible. You need documented collection attempts too.
- Books and taxes can differ - the allowance method in your books doesn't set your tax deduction. Your CPA decides that.
- Dollar figures in this article are illustrative - the $2,400 example is for illustration only. Your amounts will differ.
- Growthy tracks write-offs in your AR ledger, categorized and reconciled. It doesn't send invoices or collect on your behalf.
What Is Bad Debt and When Is a Receivable Uncollectible
Bad debt is money a customer owes you that you've given up on. It's not a slow-paying client who's 30 days late. It's a receivable you've pursued and believe you'll never collect.
There's no universal rule for when an invoice crosses that line. Most businesses treat a receivable as bad debt after 90 to 180 days past due. Collection efforts have to be stalled too. Some industries set shorter or longer norms. Your CPA and industry data can help you set a consistent policy.
Signs a Receivable Has Gone Bad
Common signs that a receivable is no longer collectible:
- The invoice is 90 to 180 days past due. No payment. No payment plan.
- You've sent at least 3 follow-ups: email, phone, and a written demand.
- The customer filed for bankruptcy or closed their business.
- The customer disputed the invoice. You've decided not to pursue it.
Take the $2,400 example used throughout this article. You did work for a landscaping client. They closed their business 5 months ago. You've called and emailed. Nothing. That's bad debt. Your AR aging report will show it in the 120-plus-day bucket.
Once you confirm it's uncollectible, two methods exist to remove it from your books.
Direct Write-Off vs. Allowance Method
Both methods handle bad debt. They differ mainly in timing and GAAP compliance.
Direct Write-Off Method
The direct write-off method is simple. You confirm a receivable is uncollectible. You remove it from AR. You record it as bad debt expense. All in the period you decide it's bad, not when you earned the revenue.
This method is common for:
- Cash-basis businesses
- Smaller companies with few receivables
- Tax return treatment for many small businesses
The downside: a timing mismatch exists. You recorded $2,400 of revenue last quarter. You write it off this quarter. Income looks too high in Q3 and too low in Q4. GAAP doesn't permit this for accrual books. It breaks the matching principle.
That said, the direct write-off method is often fine for tax purposes. Many small businesses use it on their tax return regardless of what their books show. Keep this in mind when you talk to your CPA about tax filing.
Allowance Method
The allowance method estimates bad debt in the same period you earn the revenue. You set up a reserve called "allowance for doubtful accounts." This is a contra-asset. It offsets gross AR on your balance sheet.
At period-end, you estimate what percent of your AR won't be collected. One common approach: apply your historical bad debt rate to open AR. Say 5% of your $48,000 in AR has historically gone uncollected. Your estimate: $2,400.
This method is required for accrual-basis businesses under GAAP. It matches bad debt expense to the revenue period. How active your collections process is affects this estimate directly.
Journal Entries for Each Method
The entries below use the $2,400 illustrative example. These are for illustration only. Your CPA confirms the correct entries for your situation.
Direct Write-Off Entry (ILLUSTRATIVE EXAMPLE)
When you determine the $2,400 invoice will not be collected:
If the client later pays $800, record two entries. First, restore the AR and reverse the expense:
Then record the cash receipt:
Allowance Method Entries (ILLUSTRATIVE EXAMPLE)
At period-end, estimate 5% of $48,000 in AR is uncollectible. That's $2,400:
Later, when you confirm a specific invoice won't be paid, write it off against the allowance:
This entry doesn't hit the income statement. The expense was recognized when you made the estimate. That timing difference is why the allowance method is GAAP-compliant.
The GAAP Note: Why Accrual Books Use the Allowance Method
Two principles drive the allowance requirement for accrual-basis companies.
The matching principle. Record expenses in the same period as the related revenue. You earned $2,400 in Q3. Estimate the bad debt in Q3. Don't wait until Q4 when you confirm the write-off.
The conservatism principle. When you're unsure, recognize losses early. Estimating bad debt at period-end is the conservative move. GAAP prefers it.
The allowance for doubtful accounts is a contra-asset. On your balance sheet, it reduces gross AR down to net realizable value. That's what you expect to actually collect. Investors, lenders, and your CPA see a more accurate number than raw gross AR.
If you're a small cash-basis business, you may not need the allowance method in your books. But accrual businesses must use it for GAAP.
The Tax Angle
Books and taxes can diverge here. How you treat bad debt in your books and how you report it on your return are two separate things.
Many small businesses use direct write-off on their tax return. Their books may use the allowance method. The two don't have to match.
The IRS has its own rules for when a bad debt deduction is allowable. Some service-based businesses may qualify for the non-accrual-experience method. That's an alternative approach at the tax level. One line is enough on that topic here.
Don't assume your book treatment sets your tax deduction. It doesn't. Your CPA reviews your facts and decides the correct tax-return position.
A common scenario: your books use the allowance method for GAAP. Your tax return uses direct write-off. Both can be correct at the same time. They serve different goals. Your books show an accurate financial picture. Your tax return follows IRS rules for deductibility.
Growthy is bookkeeping software, not a tax product. It tracks your AR and categorizes your write-offs. It doesn't file your return or calculate your deduction.
How Growthy Keeps Your Write-Off Trail Clean
When you mark a transaction as bad debt in Growthy, it stays clean and traceable in your AR ledger. Pattern learning handles about 85% of categorizations on first import. You review the rest.
What Growthy does: keeps write-offs categorized, reconciled, and organized by period.
What Growthy doesn't do: send invoices, run dunning sequences, or factor receivables. For those tasks, Bill.com, Invoiced, or Versapay are built for it.
Clean, categorized write-offs make your CPA's job simpler. They make audits easier too.
Frequently Asked Questions
Can you write off bad debt if you're on cash basis?
On cash basis, you record income when you receive payment. If a client never pays, you never recognized that income. So there's generally no bad debt expense to deduct in the traditional sense. The exact treatment depends on your facts. Talk to your CPA.
What's the difference between bad debt expense and allowance for doubtful accounts?
Bad debt expense is an income statement item. It reduces net income in the period you recognize it. The allowance for doubtful accounts is a balance sheet item. It's a contra-asset that offsets gross AR. It shows what you actually expect to collect.
How old does an invoice have to be before I can write it off?
There's no universal rule. Most businesses act after 90 to 180 days past due with documented collection attempts. Your industry, customer type, and tax rules all affect the answer. Ask your CPA what's supportable.
Does writing off bad debt reduce my revenue?
No. Revenue was recorded when you sent the invoice. The write-off removes the AR and records an expense. Under the allowance method, it draws down the reserve. It doesn't create a new income hit. Under direct write-off, the expense hits in the period of the write-off.
Can I recover a written-off receivable?
Yes. If a client pays after you've written it off, reverse the write-off and record the payment. The journal entries for both methods are in the section above.
What records should I keep?
Keep the original invoice, your collection attempt log (dates, methods, responses), and the decision to write it off. For the tax return, you'll need to show the debt was genuinely uncollectible. Your CPA tells you what's required for your return.
Conclusion
Bad debt happens. The $2,400 invoice that never gets paid, the client who goes silent, the customer who files for bankruptcy. The method you choose matters for your books and your reporting. Your CPA handles the return side.
Growthy is bookkeeping software, not a CPA firm. This content is educational, not professional advice.
Get started with Growthy and keep your AR write-off trail clean, categorized, and ready for review.
