Course Outline
Join PRO

How do you write off a bad account?

Author:
Harold Averkamp, CPA, MBA

Definition of the Write-off of a Bad Account

The write-off of a bad account usually refers to eliminating an account receivable due to the customer’s inability to pay the amount owed.

The entry to write off a bad account depends on whether the company is using the direct write-off method or the allowance method.

Examples of the Write-off of a Bad Account

Under the direct write-off method a company writes off a bad account receivable when a specific account is determined to be uncollectible. This usually occurs many months after the credit sale occurred. The entry to write off the bad account under the direct write-off method is:

  • Debit Bad Debts Expense (to report the amount of the loss on the company’s income statement)
  • Credit Accounts Receivable (to remove the amount that will not be collected)

.
In the U.S., the direct write-off method is required for income tax purposes, but is not the method to be used for a company’s financial statements.

Under the allowance method a company anticipates that some of its credit sales and accounts receivable will not be collected and establishes an Allowance for Doubtful Accounts prior to knowing the specific account or accounts that will become uncollectible. The Allowance account is established and adjusted with the following journal entry:

  • Debit Bad Debts Expense, and
  • Credit Allowance for Doubtful Accounts

.
When a specific customer’s account is identified as uncollectible, the journal entry to write off the account is:

  • A credit to Accounts Receivable (to remove the amount that will not be collected)
  • A debit to Allowance for Doubtful Accounts (to reduce the Allowance balance that was previously established)

Note that under the allowance method the write-off did not affect an income statement account. The income statement account Bad Debts Expense was affected earlier when the Allowance balance was established or adjusted.

For financial reporting purposes the allowance method is preferred since it means the loss (bad debts expense) is recognized closer to the time of the credit sales. This also means that the balance sheet will be reporting a lower, more realistic amount of its accounts receivable sooner.

Join PRO to Track Progress
Must-Watch Video

Learn How to Advance Your Accounting and Bookkeeping Career

  • Perform better at your current job
  • Refresh your skills to re-enter the workforce
  • Pass your accounting class
  • Understand your small business finances
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews

Features

PRO

PRO Plus

Features
Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Certificates of
Achievement

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus