Write-Off
The formal removal of an uncollectible account from your books, recognizing it as a loss.
Definition
A write-off is the accounting action of removing an uncollectible receivable from your accounts receivable balance and recording it as an expense (bad debt expense). This doesn't mean you're giving up on collection—many businesses continue collection efforts on written-off accounts—but it reflects the realistic expectation that payment is unlikely.
Write-offs affect both your balance sheet (reducing AR assets) and income statement (increasing expenses). There are two main methods: the direct write-off method (recording expense when you determine an account is uncollectible) and the allowance method (maintaining a reserve and writing off against it).
Why It Matters
Proper write-off practices ensure your financial statements accurately reflect reality. Keeping uncollectible receivables on your books overstates assets and can mislead decision-making. Write-offs also have tax implications—bad debts may be deductible, reducing taxable income.
Timing of write-offs matters for financial accuracy. Writing off too early might remove accounts that could be collected; waiting too long inflates your AR balance artificially. Most businesses establish clear policies: for example, automatically reviewing accounts at 120 days past due and writing off at 180 days if uncollectable.
Examples
- 1
An accounting firm writes off a $3,000 invoice after the client's business closes and all collection attempts fail.
- 2
A supplier uses the allowance method, maintaining a 2.5% reserve and writing off specific accounts against this reserve.
- 3
A B2B company sends written-off accounts to a collection agency, offering 25% of recovered amounts as commission.
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