How to Write Off Bad Debt (Journal Entries for Both Methods)

Every invoice sitting in your 90+ column is a small claim that your business is richer than it really is. On accrual books that sale has already been counted as revenue, taxed as profit and reported as an asset. If the customer is never going to pay, all three numbers are wrong until somebody takes it out.

This guide covers how to write off bad debt properly: when an invoice qualifies, the journal entry under each of the two accepted methods, how to turn an aging report into an allowance, what to do when a written-off customer pays after all, and the tax and sales tax wrinkles. One example runs through it: Northfield Commercial Cleaning, and a $4,800 January invoice to a restaurant client that closed its doors in March.

What Is Bad Debt, and When Does an Invoice Become One?

Bad debt is a receivable you no longer expect to collect. It is a normal cost of selling on credit — any business that invoices instead of taking cash at the counter will eventually have some — and it is an expense like any other. The mistake is not having bad debts. It is leaving them on the balance sheet as though they were still coming.

Northfield invoiced the restaurant $4,800 on January 15, net 30. By April the invoice is 60 days past due, the phone is disconnected and the premises are for lease. That receivable is not an asset any more. It is a record of a sale that will never turn into cash.

When should you write off a bad debt?

When you have reasonable evidence the money is not coming. The usual triggers:

• The customer has filed for bankruptcy, closed, or sold the business without settling.
• A collection agency has returned the account as uncollectible.
• You cannot reach the customer after documented attempts — calls, emails, a final demand letter.
• The balance is small enough that pursuing it would cost more than you would recover.

Write your rule down so it is applied the same way every time — for example, “review everything past 120 days at month end; write off at 180 days unless there is an active payment plan.” A consistent policy is what your accountant and, if it ever comes to it, an auditor or tax examiner will ask to see. The accounts receivable aging report is where that review starts.

Two Ways to Write Off Bad Debt

There are two accepted methods, and they differ in when the expense hits your profit and loss statement.

How to Write Off Bad Debt Using the Direct Write-Off Method

April 30. Northfield decides the restaurant invoice is uncollectible. The entry:

Receivables fall by $4,800, the invoice drops off the aging report, and April’s profit carries a $4,800 expense. Note the memo line matters: tag the credit to the customer and the specific invoice, so the customer’s history shows it was written off rather than simply vanishing.

Is the direct write-off method GAAP-compliant?

Only when the amounts are immaterial. The problem is timing: the sale was January revenue, but the expense lands in April — sometimes in a different fiscal year. That breaks the matching principle, which is why GAAP expects the allowance method once bad debts are large enough to affect a reader’s judgment. A sole proprietor with a handful of bad invoices a year can reasonably use the direct method; a business with a bank covenant or reviewed financial statements should not.

The Allowance Method: Estimating Bad Debt Before It Happens

The allowance method admits, every month, that some of today’s receivables will go bad — you just don’t know which ones yet. You estimate the total, expense it now, and park it in a contra-asset account called Allowance for Doubtful Accounts that sits directly under Accounts Receivable on the balance sheet. Receivables minus the allowance is the amount you genuinely expect to collect.

How do you calculate an allowance for doubtful accounts?

The most common small-business approach applies a loss percentage to each column of the aging report, rising as invoices get older. The rates below are illustrative — yours should come from your own collection history, adjusted for current conditions:

If the allowance already holds $2,900, the month-end adjusting entry tops it up by the difference:

Then, when Northfield finally gives up on the restaurant, the write-off itself doesn’t touch expense at all — it was already counted:

Net receivables don’t move on the write-off date. Both sides of the pair shrink by the same amount, which is exactly the point: the loss was recognized in the months the sales were made, not whenever someone got round to admitting it. US private companies now apply the current expected credit loss standard (ASC 326) to trade receivables, which asks the same question with a forward-looking lens; an aging-based loss rate, adjusted for conditions you can see coming, remains a common way to answer it.

A 90+ column that nobody ever writes off isn’t optimism. It’s an overstated asset and a profit figure you’ve paid tax on for money you’ll never see.

What If the Customer Pays After You Wrote It Off?

It happens more than you would think — a bankruptcy trustee sends a dividend, or an owner resurfaces wanting to open a new account. Do it in two steps so the history stays readable. First reinstate the receivable by reversing the write-off (debit Accounts Receivable, credit Bad Debt Expense under the direct method or the Allowance under the allowance method). Then record the payment exactly as you would any other: debit cash, credit Accounts Receivable. Posting cash straight to income would leave the customer’s record showing an unpaid write-off and a mystery receipt.

Bad Debt, Income Tax and Sales Tax

Can I deduct bad debt on my taxes?

In the US, a business bad debt is generally deductible in the year it becomes worthless — if the amount was previously included in income. Accrual-basis businesses booked the sale as revenue, so the write-off can be deducted. Cash-basis businesses never counted the unpaid invoice as income, so there is nothing to deduct; writing it off would double-count the loss. (See cash vs. accrual accounting for which camp you are in.) For tax, the deduction follows the specific charge-off, not the allowance estimate, so your book and tax bad-debt figures will usually differ. Confirm the details with your tax preparer.

What about the sales tax on a bad invoice?

If the invoice included sales tax that you already remitted, many states let you recover it as a deduction or credit on a later return once the debt is written off. If the tax hasn’t been remitted yet, the tax portion comes out of Sales Tax Payable rather than Bad Debt Expense. The rules vary by state, so check yours — and our guide to recording sales tax covers the liability side.

Six Ways a Bad Debt Write-Off Goes Wrong

1. Voiding or deleting the invoice. It erases the sale from history and, if the invoice is in a closed period, silently rewrites results you already reported.
2. Clearing it with a credit memo or discount. That debits a contra-revenue account, so the loss is disguised as lower sales and your bad-debt rate reads as zero.
3. Writing off on cash-basis books. The income was never recorded, so the write-off creates a second loss out of nothing.
4. Waiting for year end. The expense lands in the wrong months and every monthly report before it overstated profit.
5. Forgetting the sales tax portion. You either overstate the expense or give up tax you could have recovered.
6. Never writing anything off. The aging report fills with dead invoices, the real collection work gets buried, and the balance sheet claims money you don’t have.

How BizBooks Pro Helps You Handle Bad Debt

• A/R aging report buckets every open invoice by days past due, so the write-off review and the allowance calculation start from the same page.
• Customer statements with an aging table go out to your whole list in one run — the collection step that should come before any write-off.
• Your own chart of accounts. Add Bad Debt Expense and an Allowance for Doubtful Accounts contra-asset, and your balance sheet shows gross receivables, the allowance and the net.
• Adjusting-entry templates in Accountant Tools include a Bad Debt category, so the monthly allowance true-up is a saved entry rather than a fresh calculation from scratch.
• Journal entries on a real double-entry ledger — an unbalanced write-off simply doesn’t post.
• Credit memos with reason codes post to Sales Returns or Sales Discounts, which keeps genuine price concessions clearly separate from uncollectible debts.

Frequently Asked Questions

How do I write off a bad debt in accounting?

Under the direct write-off method, debit Bad Debt Expense and credit Accounts Receivable for the unpaid amount, tagged to the customer and invoice. Under the allowance method — which GAAP expects when bad debts are material — debit Allowance for Doubtful Accounts and credit Accounts Receivable instead, because the expense was already recognized when the allowance was built. Either way, the invoice leaves receivables and the aging report.

When should a small business write off bad debt?

When there is reasonable evidence the money won’t be collected: the customer has gone bankrupt or closed, a collection agency has given up, the customer can’t be reached after documented attempts, or chasing the balance would cost more than it’s worth. Many businesses set a written policy — review anything past 120 days, write off at 180 unless a payment plan is active.

What is the difference between the direct write-off method and the allowance method?

The direct method records bad debt expense only when a specific invoice is declared uncollectible — simple, but the expense often lands in a later period than the sale. The allowance method estimates expected losses every period, usually from the aging report, and books them to a contra-asset account. GAAP requires the allowance method unless bad debts are immaterial.

Can I deduct bad debt on my business taxes?

In the US, generally yes in the year the debt becomes worthless — but only if the amount was previously included in income. Accrual-basis businesses that booked the sale as revenue can usually deduct the write-off; cash-basis businesses can’t, because the unpaid invoice was never income. The tax deduction follows the specific write-off, not the allowance estimate, so confirm details with your tax preparer.

What happens if a customer pays after I write off their invoice?

Reverse the write-off first, then record the payment. Debit Accounts Receivable and credit whichever account you originally debited — Bad Debt Expense under the direct method, or the Allowance under the allowance method. Then post the payment normally, debiting cash and crediting Accounts Receivable, so the customer history shows the account was eventually paid.

Does writing off a bad debt mean the customer no longer owes me?

No. A write-off is an accounting decision about what your books report, not a legal release of the debt. The customer still owes the money, and you can keep pursuing it through collections, small claims court or a bankruptcy claim. You simply stop counting it as an asset you expect to collect.

The Bottom Line

Learning how to write off bad debt comes down to one idea: a receivable you don’t expect to collect isn’t an asset, and every month you leave it there, your books overstate both what you own and what you earned. Small businesses with modest receivables can write off invoices directly as they go bad. Everyone else should estimate the loss every month with an allowance, and let the write-off simply clear the invoice against it.

Either way, never make an invoice disappear by voiding it or discounting it to zero. Write it off, tag it to the customer, and keep the record — because the one time a written-off customer pays you back, you’ll want the history to show it.

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• The Accounts Receivable Aging Report: How to Read It and Act On It
• Adjusting Journal Entries: The 5 Types, With Worked Examples
• The Month-End Close Checklist for Small Business (8 Steps, In Order)
• How to Record Sales Tax in Your Books (It Isn't Revenue)
• Cash vs. Accrual Accounting: Which One Should Your Business Use?
• GAAP for Small Business: What It Is, Who Actually Needs It, and Why It Matters
• How to Record Customer Deposits (and the Deferred Revenue They Create)
• Year-End Closing Entries: How to Close Your Books at Year End