Bad Debt Write-Off: When to Write Off a Customer's Debt and How to Record It

Eight months have passed since Waleed's last payment, and his account at Sultan's building materials shop still shows SAR 3,400. Then the news arrives: Waleed has closed the decorating shop he bought the plaster and tiles for. You write off a customer's debt once documented collection attempts show that recovering it is no longer reasonably expected, or that chasing it would cost more than it would bring back; you then record it by debiting bad debt expense and crediting the customer's receivable, or by charging it against an allowance for doubtful accounts if you set one up earlier.

A write-off is an accounting decision that recognizes a loss. It is not a waiver of your claim, and it is not deleting the customer. That is why the review comes before the entry: write off too early and you give up money you could have collected; wait too long and your profit and receivables stay inflated by an amount that will never arrive. If you have not started a structured follow-up yet, begin with the overdue customer debt follow-up plan.

Before writing off: seven questions to answer in writing

1. Did you send reminders, and did you keep the date and channel of each one?
2. Did you send an account statement, and did the customer confirm the balance or dispute a specific entry?
3. Did you try more than one collection route: calls, a visit, an installment offer or a discount for paying?
4. Is there any security to fall back on, such as a guarantor, a check or goods you can take back?
5. Is a legal route available and realistic, such as a formal claim or filing your debt in bankruptcy or liquidation proceedings, depending on your country's rules?
6. Is the cost of pursuing it, in time, fees and charges, lower than the amount you expect to recover?
7. Have you documented the decision: its date, the reason, who approved it and the supporting papers?

Before answering, make sure the balance itself is right; reconciling the customer account may turn up a payment that was never recorded. This is what Sultan found in Waleed's file:

The conclusion: recovery is no longer expected, so in February Sultan decided to write off the full amount while keeping his right to collect if Waleed resurfaces. Had Waleed offered to pay part of it, Sultan would have written off only the rest.

Method 1: the direct write-off when the loss is confirmed

You record nothing until you make the decision, then move the debt from the customer's account to expenses:

• Bad debt expense: debit 3,400, because the loss has become an expense.
• Accounts receivable, Waleed: credit 3,400, because the amount is no longer an asset waiting to be collected.

The drawback is timing. The materials were sold last year and their revenue showed up there, while the loss appears in February of the new year. That is why accounting standards generally do not accept this method when bad debts have a material effect.

Method 2: an allowance set up before you know who will default

On December 31, Sultan's customers owed a total of SAR 60,000, including Waleed's account. Based on past years, he estimated that 6% of it would not be collected, or 3,600. At year end he records:

• Bad debt expense: debit 3,600.
• Allowance for doubtful accounts: credit 3,600. This account is subtracted from receivables, so the net amount shown is 56,400.

In February, when Waleed's default is confirmed, no new expense is recorded because the loss was already estimated:

• Allowance for doubtful accounts: debit 3,400.
• Accounts receivable, Waleed: credit 3,400.

Assuming no other activity, receivables drop to 56,600 and the allowance to 200, so the net stays at 56,400. The write-off only puts a name on the loss; its effect on profit already appeared in the year of the sale. OpenStax's section on uncollectible accounts walks through estimating the allowance as a percentage of sales, a percentage of receivables or by aging the balances.

Direct write-off or allowance? A quick comparison

If the customer pays after the write-off

In July, Waleed sent SAR 1,400 and said he could not pay more for now. Do not record it as income from nowhere. First reinstate the debt for the amount collected, then record the collection, so Waleed's history shows that he paid:

• Reinstating under the allowance method: debit Waleed's account 1,400, credit the allowance 1,400.
• Reinstating under the direct method: debit Waleed's account 1,400, credit bad debt expense 1,400, or a bad debts recovered account if the year of the write-off has already been closed.
• Then, under either method, the collection: debit cash 1,400, credit Waleed's account 1,400.

The remaining 2,000 stays written off in the books. If he pays it later, repeat both steps for the new amount.

Tax and documentation: the rules depend on the country

Deducting a bad debt from taxable income comes with conditions set by each tax authority, such as proof of collection attempts or an actual write-off in the books. Some systems do not accept an estimated allowance for tax and require a specific debt to be written off; OpenStax notes this for the US system. Some VAT systems also let you adjust the tax on an unpaid invoice under specific conditions. Check with your tax authority or accountant before relying on any of this, and keep the reminders, statements and write-off decision together.

Don't delete Waleed: keeping an honest record in a balance-tracking app

A balance-tracking app is not a journal, but it is the best witness to the story of a debt. In Zawid Accounts, keep Waleed's account and all its transactions as they are: the debts, the partial payments and the statement you sent. Deleting the customer or his transactions erases the evidence you may need for tax purposes or a later claim.

• Write the reason for the default, the decision date and the amount in a clear note, such as "Shop closed, four reminders, 3,400 written off in February."
• Do not record the write-off as a payment. A payment means money actually arrived, so it would mislead both your treasury balance and the customer's history.
• When you review your total receivables, remember that this balance is written off in the books even though it is still visible.
• If he pays later, record a normal payment on its date, so the whole story stays in one statement.

The app does not post a bad debt expense entry or keep an allowance; those entries belong in your accountant's books. What it gives you is the record the decision rests on: a dated balance, partial payments, a PDF statement to attach to the write-off file, and the collection center to log contact outcomes and payment promises. So the story does not repeat, read when to stop selling on credit.