How to Write Off Accounts Receivable

Writing off accounts receivable means removing a specific customer invoice from the books after the company determines it will not be collected. Under the allowance method used for GAAP reporting, the write-off is recorded by debiting the allowance for doubtful accounts and crediting accounts receivable. The write-off reduces receivables to the amount the company actually expects to collect.

What Is the Difference Between a Write-Off and an Allowance?

The allowance for doubtful accounts estimates future credit losses across the whole receivable balance each reporting period, while a write-off removes a specific invoice once it is confirmed uncollectible. The allowance is set up in advance based on aging or loss history, and the write-off uses that allowance when a specific loss is confirmed.

Estimating the allowance is covered in our guide to the allowance for doubtful accounts. This guide covers the write-off itself.

When Should You Write Off an Account Receivable?

A company should write off an account receivable when there is clear evidence it will not be collected and the write-off has been approved under company policy. Common triggers include customer bankruptcy, the customer ceasing operations, completion of all required collection steps without payment, an unsuccessful collection agency referral, an untraceable customer, or collection costs that exceed the amount owed.

Most companies define these triggers in a written credit and collections policy. Policies often combine an age threshold, such as 180 or 365 days past due, with evidence that the required collection attempts were made.

How Do You Write Off Accounts Receivable?

To write off accounts receivable, confirm the open balance is accurate, document the collection efforts made, obtain approval under the write-off policy, post the journal entry, update the customer record and credit status, and confirm the write-off is recorded in both the AR subledger and the general ledger.

01

Confirm the balance.

Check that the open amount is not affected by unapplied payments, open credit memos, or disputes still under review.

02

Document collection efforts.

Record the reminders, calls, escalation letters, and agency referrals made on the account. This supports the decision for auditors and for tax purposes.

03

Get approval.

Route the write-off to the approver set by the policy. A common structure assigns small balances to the AR manager, mid-size balances to the controller, and large balances to the CFO.

04

Post the journal entry.

Use the allowance method if the company reports under GAAP.

05

Update the customer record.

Close the invoice in the AR subledger, flag the account, and update the customer's credit status so new credit is not extended without review.

06

Confirm both records match.

A write-off posted in only one record is a common cause of AR reconciliation differences.

What Is the Journal Entry to Write Off Accounts Receivable?

Under the allowance method, the journal entry to write off accounts receivable is a debit to the allowance for doubtful accounts and a credit to accounts receivable. Under the direct write-off method, the entry is a debit to bad debt expense and a credit to accounts receivable.

Allowance method example:

A $4,000 invoice is confirmed uncollectible.

This entry does not affect the income statement, because the expense was recorded earlier when the allowance was estimated. It also does not change net accounts receivable, because both accounts receivable and its contra account decrease by the same amount.

Direct write-off method example:

The same $4,000 invoice.

Under this method, the expense is recorded only when the specific invoice is written off. For how bad debt expense is presented, see bad debt expense on the balance sheet.

Allowance Method vs Direct Write-Off Method

The allowance method records bad debt expense in the period the related sales occur, while the direct write-off method records it only when a specific invoice is written off. Because the direct method does not match the expense to the related revenue, it is not accepted under GAAP when bad debts are material.

How Do You Record a Partial Write-Off?

A partial write-off records the portion of a balance that will not be collected after a settlement or partial recovery. For example, if a customer pays $7,000 in full settlement of a $10,000 invoice, the company records the cash received and writes off the remaining $3,000 against the allowance:

Keep the settlement agreement and approval on file. Without them, the $3,000 reduction appears as an unexplained adjustment.

How Should Small Balances Be Written Off?

Small residual balances, such as rounding differences, bank fees, or minor short payments, are usually written off under a small-balance threshold defined in policy. Balances below the threshold are pre-approved and written off in a monthly batch, with the total reviewed by the AR manager.

Set the threshold low enough that it does not hide recurring deductions. Repeated small short payments from the same customer may indicate a deduction pattern that should be investigated rather than written off.

How Do You Record a Recovery After a Write-Off?

To record a recovery of a previously written-off account, first reinstate the receivable by debiting accounts receivable and crediting the allowance for doubtful accounts, then record the payment by debiting cash and crediting accounts receivable. Using two entries keeps the customer's payment history complete.

Example. A customer pays $4,000 that was previously written off.

Reinstating the receivable:

Recording the payment:

Under the direct write-off method, the reinstatement credits bad debt expense or a recovery income account instead of the allowance.

How Are Credit Balances Handled?

A credit balance means the company owes the customer, usually because of an overpayment or duplicate payment, so it is not written off as a bad debt. The company should contact the customer and either refund the amount or apply it to future invoices. If the customer cannot be reached, the balance may be subject to state unclaimed property rules, which in most US states require unclaimed customer credits to be reported after a dormancy period.

How Are Written-Off Receivables Treated for Tax?

For US federal income tax purposes, business bad debts are generally deducted when a specific debt becomes wholly or partially worthless, not when an allowance is estimated. As a result, book and tax treatment of bad debts often differ. The IRS explains the rules in Topic No. 453, Bad Debt Deduction. Confirm the treatment of specific write-offs with a tax advisor.

Should You Write Off an Account or Send It to a Collection Agency?

Send an account to a collection agency when internal collection efforts have failed but recovery is still possible, and write it off when collection is no longer expected. Agencies typically charge a fee based on amounts recovered. Many companies refer an account to an agency first and write it off once the agency confirms recovery is unlikely, keeping the receivable fully reserved in the meantime.

What Should a Write-Off Policy Include?

A write-off policy should define the receivables it covers, the triggers for write-off, the collection steps required first, the documentation needed, an approval matrix by dollar amount, the accounting method and accounts used, a small-balance threshold, the treatment of recoveries, the customer credit status after a write-off, and monthly write-off reporting.

Strong write-off controls also include segregation of duties, so the person who applies cash does not approve write-offs, and a monthly review of write-offs by customer, reason, and approver. A consistent collections process reduces how many accounts reach this stage; structured collections workflows make sure every account follows the same steps before it is considered for write-off.

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