Write off: meaning and examples

To write off an invoice means to record it in your books as uncollectible and remove it from accounts receivable. The money is treated as a loss, usually called bad debt expense. It is an accounting action, not a statement that the customer owes nothing.

How it works

An unpaid invoice sits on your books as an asset in accounts receivable, because you expect to be paid. When it becomes clear the money will not arrive, that asset is overstated. Writing it off corrects the books.

There are two common methods:

• Direct write off. You wait until a specific invoice is deemed uncollectible, then record the loss. It is simple and common for small businesses.
• Allowance method. You estimate in advance how much of your receivables will go bad and set aside an allowance. When an invoice is written off, it comes out of the allowance.

Before writing off, try to collect. Review your aging report, send reminders, call the client and consider a payment plan. Keep a record of every attempt. A written-off invoice is a form of bad debt.

A write off affects taxes. In the US, a business that reports income when invoiced, called accrual basis, can generally deduct business bad debt once it becomes worthless. A cash-basis business, which counts income only when paid, usually has no deduction because the income was never reported. The IRS covers this in its business expenses guidance. Rules vary, so talk to an accountant.

If the client pays later, you reverse the write off and record the payment.

Example

A consultant invoiced a client $2,400 in March. After four reminders and a final notice, the client’s company has closed. In December the consultant decides to write it off.

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Related terms

• Bad debt: the expense recorded when you write off.
• Accounts receivable: where the unpaid invoice sits.
• Aging report: shows which invoices are overdue.
• Credit memo: reduces an invoice when the dispute is about the amount, not collection.