Journal entry for bad debt written off

Introduction

In business, we may need to write off the bad debt accounts that have a long overdue of outstanding as we probably won’t get our money back. In this case, we can make the journal entry for bad debt written off to remove the bad debt or uncollectible accounts from our balance sheet.

In accounting, we usually use the allowance method to deal with the bad debt as this method complies with the matching principle of accounting. In other words, the bad debt expense will usually match with the credit sales revenue that our company generates as we make the allowance for doubtful accounts at every period-end adjusting entry.

However, some companies may use the direct charge-off method to deal with bad debt. This method does not try to match the expenses with the revenues the companies generate as there is no allowance for doubtful accounts made at the period end adjusting entry. Likewise, the bad debt expense will only occur when companies decide to write off the bad debt accounts.

Hence, the direct charge-off method is usually used only when the amount of credit sales or balance of accounts receivable is considered insignificant. Of course, we may also see the direct charge-off method in the calculation of the taxable income under the tax rule.

Journal entry for bad debt written off

Allowance method

We can make the journal entry for bad debt written off under the allowance method by debiting the allowance for doubtful accounts and crediting the accounts receivable.

Journal Entry
AccountDebitCredit
Allowance for doubtful accounts###
Accounts receivable###

In this journal entry, the allowance for doubtful accounts is the contra account to accounts receivable in which its normal balance is on the credit side. Likewise, there is zero impact on the total assets of the balance sheet in this journal entry as the net realizable or cash realizable of the long-overdue accounts receivable should already be zero before the written-off activity occurs.

Similarly, the journal entry for bad debt written off does not include the bad debt expense of the income statement. This is because we should have already recorded the bad debt when we estimate the bad debt and doubtful accounts at the period-end adjusting entry.

Bad debt written off example

For example, on November 30, we decide to write off the bad debt accounts that have been long overdue for more than 360 days. The total amount of the bad debt written off is $50,000 which belongs to our customers that made the credit purchase.

Based on our past experience, we determine that this amount is unlikely to be recoverable as we have tried many possible ways in the collection of receivables for many months but to no avail. This is why we decide to write off their accounts from our balance sheet.

We use the allowance method to deal with bad debt, so the net book value of their accounts on the balance sheet is already zero.

In this case, we can make the journal entry for this $50,000 bad debt written off on November 30, by debiting this $50,000 amount into the allowance for doubtful accounts and crediting the same amount to the accounts receivable.

Journal Entry
AccountDebitCredit
Allowance for doubtful accounts50,000
Accounts receivable50,000

This journal entry has zero impact on the balance sheet as the net book value of the customers’ accounts that have been written off here is already zero. However, the balance of the accounts receivable as well as the balance of the allowance for doubtful accounts will reduce by $50,000 as of November 30.

Direct charge off method

Alternatively, we may see that some companies use the direct charge-off method to write off the uncollectible accounts by directly reducing the accounts receivable and charging the written-off amount to the income statement as the bad debt expense.

Likewise, if we use the direct charge-off method for writing off the bad debt, we can make the journal entry with the debit of the bad debt expense account and the credit of accounts receivable.

Journal Entry
AccountDebitCredit
Bad debt expense###
Accounts receivable###

This journal entry will increase the total expenses on the income statement while decreasing the total assets on the balance sheet as we charge the written-off amount into bad debt expense on the income statement at the time of writing off of the bad debt.

For instance, assuming that we use the charge-off method in the example above to deal with the bad debt. In this case, we would have not recorded the bad debt expense of $50,000 to the income statement yet.

If this is the case, we can make the journal entry for the $50,000 bad debt written off under the direct charge-off method by debiting this amount of $50,000 into the bad debt expense on the income statement as below:

Journal Entry
AccountDebitCredit
Bad debt expense50,000
Accounts receivable50,000

We record the bad debt expense upon writing off of the accounts receivable this way because, under the direct charge off method, there is no estimation of the bad debt made at the period adjusting entry. Hence, charging the bad debt expense this way does not mean we make the double recording of the bad debt expense.

However, it does mean that we stray away from the matching principle of accounting as we do not record the expense at the period it occurs. In order words, the bad debt expense should have already occurred long before we decide to write off the bad debt accounts (e.g. with the evidence of long-overdue accounts and other indicators).

This is why the direct charge-off is usually considered going against the accounting rule. Hence, we usually see the companies use this direct charge-off for the insignificant amount of accounts receivable or for the purpose of calculating the taxable income under the tax rule.

Of course, as the accounting rule and the tax rule is different from each other; hence, using the direct charge-off to write off the bad debt that its amount is considered material for preparing the financial statements is still going against the generally accepted accounting principles.