What is a write-off?

Definition

A write-off is the entry that takes a balance off the books because it will not be collected or paid. On a customer account, the accounts receivable from an unpaid invoice is removed, and an expense is recorded instead.

It is a recognition that the cash is not coming. It is not a payment, a discount, or a courtesy credit.

The usual home for the expense is bad debt expense on the Income Statement. The asset that leaves is the receivable that sat in current assets.

Where it shows up

Balance Sheet: Located in the current assets section, as a reduction of the receivable.

P&L: Related to the bad debt expense the write-off records.

Cash flow: Related to nothing extra; that cash is not coming.

See also: Bad Debt Expense · Allowance For Doubtful Accounts · Accounts Receivable

When you look at the Balance Sheet, you will not find a line with this name. You will find a smaller receivable, because the uncollectible amount is no longer treated as an asset.

On the Income Statement, the cost shows as bad debt expense in the period you decide the balance is gone. That expense reduces profit even though no new cash went out.

The Statement of Cash Flows does not pick up a collection. Operating cash never arrives for the amount you removed.

In the customer file, the invoice is closed as uncollectible rather than as paid. Anyone opening the account should see that the balance was dropped, not settled.

How it works

A write-off starts after collection attempts fail, or after the customer is clearly unable to pay. Closing, bankruptcy, and a bounced final check are common triggers.

The books then debit bad debt expense and credit accounts receivable. That pair takes the asset off the Balance Sheet and puts the loss on the Income Statement.

Some businesses keep an allowance for doubtful accounts and apply the invoice against that reserve instead. The end result for the customer balance is the same: the receivable is gone.

The original invoice stays in history. It is no longer an open amount that you expect to collect.

If cash later arrives after all, reverse the write-off first and then record the collection. Do not leave the old receivable sitting as if it had never been removed.

Stay on this entry. A credit memo is a billing document that lowers what a willing customer still owes, not a way to bury a dead account.

Example

A florist had a $400 cafe invoice still open. The cafe closed, and there is no realistic path to collect.

The florist writes off the $400. The books record:

Debit: Bad debt expense $400

Credit: Accounts receivable $400

Accounts receivable falls by $400. Bad debt expense of $400 hits the Income Statement.

No cash moves. The $400 that was sitting as an asset is now an expense, and the cafe's open balance is gone.

If the cafe later mailed a surprise check, the florist would reverse this entry first. Only then would cash and the receivable be recorded in the usual way.

Common mix-ups

A write-off is not a credit memo. A credit memo lowers a balance the customer still might pay, and a write-off removes a balance you have given up on.

A write-off is not a payment. Payment brings cash in and clears the receivable because the customer paid, not because you stopped expecting them to.

A write-off is not an early payment discount. A discount is a price cut for paying soon, and this entry is a loss on an amount that will not be paid at all.

Related terms

• Bad Debt Expense: The expense recorded when receivables are judged uncollectible.
• Allowance For Doubtful Accounts: A contra-asset reserve estimating the share of receivables that will not be collected.
• Accounts Receivable: Money customers owe the business for goods or services already delivered.
• Collections: The process of following up on unpaid customer invoices.
• Journal Entry: A dated record of debits and credits posted to the ledger.
• Accounts Receivable Aging: A report bucketing open invoices by how long they have been outstanding.
• Credit Memo: A document that reduces what a customer owes.
• Materiality: The threshold at which an error or item is big enough to matter to a reader.