Write Off Accounts Receivable

Overview

The company may use many methods, such as sending letters, making calls, and taking legal action, to collect the receivables that are past due. However, there may be still some accounts that are still uncollectible even after applying those methods. In this case, the company may decide to write off the receivables of those accounts from its accounting record.

A write-off is an action of the elimination of a particular customer’s account balance due to the uncollectibility of receivables. When the company writes off accounts receivable, such accounts will need to be removed from the balance sheet.

Usually, a write-off will reduce the balance of accounts receivable together with the allowance for doubtful accounts. This is the case in which the company uses the allowance method for an estimate of losses from bad debt.

However, sometimes the company doesn’t have the allowance for doubtful accounts as it follows the direct write off method instead. In this case, the company will have to make bad debt expense on the debit side of the journal entry while crediting accounts receivable to remove the written-off account from the balance sheet.

Write off accounts receivable journal entry

Allowance method

When the company writes off accounts receivable under the allowance method, it can make journal entry by debiting allowance for doubtful accounts and crediting accounts receivable.

Account Debit Credit
Allowance for doubtful accounts xxx
Accounts receivable xxx

In this case, writing off accounts receivable affects the balance sheet only; nothing changes to the income statement. This is due to the company has already recognized expenses when it makes allowance for doubtful accounts in the adjusting entry for the estimated losses from bad debt or uncollectible accounts.

Likewise, the net realizable value in the balance sheet remains the same. This is because the write-off reduces the same amount of both accounts receivable and allowance for doubtful accounts.

Example

For example, on September 05, 2020, the company ABC Ltd. decide to write off Mr. D’s account with the receivable balance of USD 2,000.

In this case, the company can make the journal entry of accounts receivable write-off as below:

Account Debit Credit
Allowance for doubtful accounts 2,000
Accounts receivable 2,000

It is useful to note that after writing off accounts receivable, the balance of allowance for doubtful accounts, which is on the credit side in nature, may stay on the debit side instead. This is a case in which the write-off amount is more than the balance of allowance doubtful accounts.

However, the balance will be back to be normal after adjusting entry for bad debt because the company will add the debit balance to the required balance in the adjusting entry.

For the example above, assume the company ABC Ltd. had the allowance for doubtful accounts of USD 1,500 on the credit side before writing off Mr. D’s account. Hence, the allowance account after writing off will remain as a debit balance of USD 500 (2,000-1,500).

Assuming the estimated losses from bad debt at the year-end of 2020 is USD 3,000, the company will need to make an allowance for doubtful accounts of USD 3,500 (3,000 + 500) in the adjusting entry. This is due to the company need to add the debt balance of USD 500 on to the required balance of USD 3,000.

Hence, the adjusting entry for the estimated losses from bad debt will be with the USD 3,500 instead of USD 3,000 as below:

Account Debit Credit
Bad debt expense 3,500
Allowance for doubtful accounts 3,500

Direct write off method

Direct write-off method is usually only be used by the company that has only a small amount of credit sales or an insignificant balance of receivables. In this method, the company does not make an estimation of bad debt for adjusting entry, so no allowance for doubtful accounts is created.

Likewise, the company does not make journal entry of accounts receivable write-off like those under the allowance method. And as there is no estimate of losses and no allowance account, the company has not recognized expense for any potential bad debt yet.

So, the company will need to make bad debt expense when writing off accounts receivable under the direct write off method. In this case, a write-off affects both the balance sheet and income statement.

Under the direct write-off method, when the company writes off accounts receivable, it will debit bad debt expense and credit accounts receivable.

Account Debit Credit
Bad debt expense xxx
Accounts receivable xxx

For example, the company XYZ Ltd. decides to write off accounts receivable of Mr. Z that has a balance of USD 300.

In this case, the company can make the journal entry of the written-off receivables under the direct write off method as below:

Account Debit Credit
Bad debt expense 300
Accounts receivable – Mr. Z 300

It is useful to note that the direct write-off method does not conform to the matching principle of accounting. Hence, we may not come across such a method in the company that follows acceptable accounting standards.