Home / Blog / Writing off bad debt

Collection

How Do You Write Off a Bad Debt Invoice? A Practical Guide

A practical guide to writing off a bad debt invoice: when to do it, direct write-off vs the allowance method, the steps, the tax note, and how to prevent it.

October 1, 2026 · 5 min read

A bad debt is an invoice you have issued, recorded as revenue, and no longer expect to be paid. Writing it off removes it from your receivables so your books show what you can realistically collect. It is an accounting entry, not a legal release: writing off an invoice does not, by itself, cancel what the customer owes.

When should you write off an invoice?

There is no single universal trigger, but a debt becomes a candidate once collection has realistically failed. Typical signs include:

• Insolvency: the customer has gone bankrupt, entered liquidation, or cannot be traced.
• No response: reminders, calls, and a formal demand have gone unanswered for a long time.
• Uneconomic to chase: the amount is too small to justify the cost of further collection or legal action.
• Disputed or settled: you have decided not to pursue a disputed balance, or a settlement has reduced it.
• Age: many businesses set an internal cut-off such as 90 or 180 days overdue, but that is company policy, not a rule of law.

Put your threshold in a written credit policy so write-offs are consistent rather than decided case by case.

Direct write-off vs the allowance method

There are two common ways to account for bad debt.

Direct write-off method

You wait until a specific invoice is judged uncollectible, then record a bad debt expense and reduce accounts receivable at that moment. It is simple and common among small businesses, but the expense can land in a later period than the sale it relates to.

Allowance method

At the end of each period you estimate the share of receivables you do not expect to collect, and record a bad debt expense with a matching “allowance for doubtful accounts”. When a specific invoice is later written off, you debit the allowance and credit receivables, so there is no second hit to profit. This matches the expense to the period of the sale and is generally expected under accrual-based frameworks such as IFRS and US GAAP once balances are material.

Steps to write off a bad debt invoice

• Confirm collection is exhausted. Keep a record of the reminders, calls, and demand letters you sent.
• Get approval. Follow your policy, and require a second signature for larger amounts.
• Record the entry. Direct method: debit bad debt expense, credit accounts receivable. Allowance method: debit the allowance, credit accounts receivable.
• Update the customer account. Mark the invoice as written off, keep the original reference, and issue a credit note only if your accounting or tax rules call for one.
• File the evidence. Store the approval, the date, and the proof of collection attempts with the record.
• Stay alert to recoveries. If the customer pays later, reverse the write-off and record the receipt rather than hiding it.

A tax and accounting note

The tax treatment of bad debt differs a great deal from country to country. Some jurisdictions only allow a deduction once the debt has been formally written off in your books or shown to be uncollectible, and only if the sale was previously included in taxable income. Relief for VAT or sales tax on unpaid invoices usually has its own conditions and time limits, and may require a credit note. Do not assume the rules; check them with your accountant or tax adviser before you rely on a deduction. This article is general information, not tax or accounting advice.

How to prevent bad debt

• Check before you extend credit: run credit checks on new customers and set a limit for each.
• Be explicit about terms: state the due date and late-payment terms on every invoice, and take deposits on larger jobs.
• Invoice promptly and accurately: errors and delays give customers an easy reason to pay late.
• Follow up on a schedule: remind before the due date and again soon after it passes.
• Watch the ageing report: review overdue balances weekly so problems surface early.

Most bad debt is not sudden; it is an overdue invoice that nobody chased in time. FulcrumGrid Collection tracks invoices through reminders and follow-ups and shows what is overdue at a glance, so accounts are chased early instead of discovered at year-end. It cannot make a customer pay, but it keeps the evidence trail tidy and makes the write-off decision clearer when it does come.

Frequently asked questions

What does it mean to write off a bad debt?

It means removing an unpaid invoice from your accounts receivable because you no longer expect to collect it, and recording the loss as an expense. It is an accounting entry; it does not on its own cancel the customer's obligation to pay.

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

Under direct write-off you record the expense only when a specific invoice is judged uncollectible. Under the allowance method you estimate expected losses at period end and set up an allowance, then charge individual write-offs against it. The allowance method matches costs to the sales period.

Can I still collect a debt after writing it off?

Often yes. A write-off is a bookkeeping decision, and the legal right to claim the money may remain, subject to local time limits. If the customer pays later, reverse the write-off and record the receipt.

Can I get tax relief for a bad debt?

Possibly, but the rules vary by country and by tax type, and usually come with conditions and deadlines. Check with your accountant or tax adviser before claiming a deduction or VAT relief.

← Back to the blog