The allowance already holds the loss.
Most guides, such as this one on bad debt write-offs, give two entries side by side. The direct method debits bad debt expense when an invoice is written off. The allowance method debits the allowance, because the expense was booked earlier, when the allowance was built. They are usually presented as a choice of method. The harder case is a company that keeps an allowance and also has a system, or a habit, that sends write-offs to expense.
The standard is short on this. ASC 326-20-35-8, as reproduced in Deloitte’s CECL roadmap, says write-offs, full or partial, “shall be deducted from the allowance” and are recorded in the period the receivable is deemed uncollectible. So the target is clear. What matters in practice is whether your month end gets you there whichever entry was posted.
One invoice, one October, three ways to book it.
A software company sets its allowance from the receivables aging at each month end. At 30 September the aging called for 9,000, including the whole of invoice 2087 for 6,400, which was 120 days past due. On 16 October the customer’s administrator wrote to say unsecured creditors should expect little. The invoice is now deemed uncollectible, so it is written off in October. At 31 October the aging calls for 3,100: the 2,600 still needed on other invoices plus 500 for accounts that slipped past 90 days during the month. Gross receivables after the write-off are 212,000. Every figure is an example.
The entries, in date order
30 Sept Allowance set from the aging: 9,000
includes 6,400 for invoice 2087,
120 days past due, reserved in full
16 Oct Invoice 2087 deemed uncollectible
(administrator's letter on file)
Path A Dr Allowance for doubtful accounts 6,400
Cr Accounts receivable 6,400
31 Oct Aging needs 3,100; allowance holds 2,600
Dr Bad debt expense 500
Cr Allowance for doubtful accounts 500
Path B Dr Bad debt expense 6,400
Cr Accounts receivable 6,400
31 Oct Aging needs 3,100; allowance holds 9,000
Dr Allowance for doubtful accounts 5,900
Cr Bad debt expense 5,900
October bad debt expense, either path: 500| Path | Write-off entry | Month end step | October expense | Allowance at 31 Oct | Net receivables |
|---|---|---|---|---|---|
| A. Write off against the allowance | Dr Allowance 6,400, Cr Receivables 6,400 | Top up 500 | 500 | 3,100 | 208,900 |
| B. Write off to bad debt expense, then measure the allowance | Dr Bad debt expense 6,400, Cr Receivables 6,400 | Release 5,900 | 500 | 3,100 | 208,900 |
| C. Write off to bad debt expense, allowance left alone | Dr Bad debt expense 6,400, Cr Receivables 6,400 | None | 6,400 | 9,000 | 203,000 |
Paths A and B land in the same place: 500 of expense, an allowance of 3,100 and net receivables of 208,900. B shows a gross 6,400 and a release of 5,900 on the bad debt line, which is worth one sentence in the variance notes. Path C is the one to design out. The loss was expensed in September when the reserve was built, and again in October, so October is 5,900 too high and the balance sheet still holds a reserve for an invoice that no longer exists.
The fix is a month end step that never depends on memory: after the last write-off, set the allowance to what the aging requires and post the difference, up or down. Done that way, the entry used for each write-off stops mattering to the numbers.
For tax, the write-off date is the one that counts.
The allowance moves book expense earlier. US tax does not follow it. The reserve deduction in 26 U.S.C. 166, subsection (c), is shown as repealed since 1986, so most businesses deduct a bad debt only when the specific debt becomes worthless. For a debt that is only partly worthless, 26 CFR 1.166-3 allows the deduction only to the extent charged off during the taxable year, and you must be able to show the part charged off. The IRS bad debt topic adds that the amount must have been included in income, which an accrual basis company has done when it invoiced.
In the example the September reserve and the October write-off fall in the same tax year, so nothing is left over. Move the dates to December and January and the book expense sits in one year while the deduction sits in the next, which is a temporary difference for the tax provision. Either way, each write-off record, with its date, amount, reason and the letter behind it, is your charge-off evidence. This is general information, not tax advice for your case.
When the customer pays some of it back.
In March the administrator pays a first distribution of 1,600 on invoice 2087. The order is the same under any method: put the receivable back, then apply the cash, so the customer history shows the invoice was paid and the payment does not land as unapplied cash. If only part is recovered, the rest is written off again. Both routes below leave bad debt expense 1,600 lower and the invoice at zero.
A 1,600 recovery, two ways
12 Mar Administrator pays 1,600 on invoice 2087
Against the allowance
Dr Accounts receivable 1,600
Cr Allowance for doubtful accounts 1,600
Dr Cash 1,600
Cr Accounts receivable 1,600
(month end: allowance measured again,
the 1,600 comes back through the release)
In Rivane, where the write-off went to expense
reverse the 6,400 write-off
Dr Accounts receivable 6,400
Cr Bad debt expense 6,400
apply the 1,600 payment
Dr Cash 1,600
Cr Accounts receivable 1,600
write off the remaining 4,800 again
Dr Bad debt expense 4,800
Cr Accounts receivable 4,800
Net effect, either way: expense 1,600 lower,
receivables back to zero for invoice 2087How Rivane handles customer write-offs today.
In Rivane a write-off is its own record, linked to the invoice and the customer. It posts a debit to Bad Debt Expense and a credit to Accounts Receivable, dated the day it is posted, so it lands in the period you decide the invoice is uncollectible. It can be full or partial; a full write-off marks the invoice Written Off rather than Paid. Each write-off carries an approval tier with a ceiling: 5,000 for a credit manager, 50,000 for a controller, and no limit for the CFO. The 6,400 in the example needs the controller tier, and a request above the tier’s ceiling is refused. A recovery reverses the whole write-off and restores the balance due before the payment is applied, which is why the Rivane route above writes off the remaining 4,800 again.
Rivane customer write-offs, as built
# Rivane customer write-offs, as built.
write-off its own record, linked to the invoice,
the customer and the entity
posts Dr Bad Debt Expense (6700),
Cr Accounts Receivable (1200), dated
the day it is posted
full or partial; a full write-off
marks the invoice Written Off, not Paid
refused on a draft or voided invoice,
above the balance due, or in another
currency
approval credit manager up to 5,000, controller
up to 50,000, CFO above that, in the
invoice currency's own units
a write-off above the tier's ceiling
is refused
recovery reverses the whole write-off and
restores the balance due before the
payment is applied
history per customer write-off history; every
write-off and reversal is recorded as
a ledger event
chart the default chart also seeds 1210
Allowance for Doubtful Accounts
not built no write-off screen yet: it is an API
call today
no write-off straight to the allowance
the tier is sent with the request and
checked against its ceiling, not taken
from the user's role
Limits worth knowing. The write-off is an API call today, with no screen yet. It posts the direct entry, so a team that keeps an allowance runs Path B: measure the allowance from the aging at month end, against the 1210 Allowance for Doubtful Accounts account the default chart already seeds. And the approval tier is sent with the request and checked against its ceiling; it is not yet taken from the approver’s role.
Make the allowance measurement the last step of every close.
Write off in the month you decide an invoice is lost, keep the letter or the reason with it, and set the allowance from the aging after the last write-off. Then the method question answers itself, the tax file has its charge-off dates, and a late payment from a customer you had given up on is a small, pleasant entry.
To see invoices, receipts and the receivables aging working together, look at Rivane accounts receivable.
Frequently asked questions.
If we keep an allowance, should a write-off go to bad debt expense or to the allowance?
To the allowance. ASC 326-20-35-8 says write-offs are deducted from the allowance in the period the receivable is deemed uncollectible. If your system can only post a write-off to bad debt expense, the numbers still come out right as long as you measure the allowance again from the aging at month end, because the release cancels the extra expense. If you skip that step, the loss is counted twice.
Is our allowance for doubtful accounts tax deductible?
For most US businesses, no. The reserve deduction in 26 U.S.C. 166(c) was repealed in 1986. The deduction comes when a specific debt becomes worthless and is charged off, and for a partly worthless debt only the part charged off during the year counts under 26 CFR 1.166-3. So the date and amount of each write-off matter for tax even when the allowance already carried the loss on the books.
What is the entry when a customer pays an invoice we already wrote off?
Put the receivable back first, then record the cash against it, so the customer history shows the invoice was paid. Under the allowance method that is a debit to receivables and a credit to the allowance, then cash against receivables, and the month end measurement brings the amount back through the release. If only part is paid, write the rest off again.
Sources
- Deloitte, Roadmap: Current Expected Credit Losses, section 4.5 Write-Offs and Recoveries. Reproduces ASC 326-20-35-8: write-offs, full or partial, are deducted from the allowance in the period the asset is deemed uncollectible, and expected recoveries belong inside the allowance estimate.
- 26 U.S.C. 166, Bad debts (Cornell Legal Information Institute). A deduction for a debt that becomes worthless in the year, a partial deduction limited to the part charged off, and subsection (c), the reserve deduction, shown as repealed in 1986.
- 26 CFR 1.166-3, Partial or total worthlessness (Cornell Legal Information Institute). A partly worthless debt is deductible only to the extent charged off during the taxable year, and the taxpayer must be able to show the part charged off.
- IRS, Topic no. 453, Bad debt deduction. Business bad debts can be deducted in full or in part, and only if the amount owed was included in gross income in the current or a prior year.
- Ordway, Bad debt write off. Read as a current answer: it covers the direct and allowance entries and the two step recovery, with no example across months and nothing on what happens when both are used together.
A note on how this was researched. ASC 326-20-35-8 was read as reproduced on Deloitte’s DART site, and the tax rules on the Cornell Legal Information Institute pages and the IRS site; all are HTML pages read directly. The company, the invoice and every amount are examples. The Rivane section describes the product as built today, checked against the write-off code rather than marketing copy. This is not accounting or tax advice for your specific case.
On embedded social posts: we looked for public posts from standard setters or practitioners on writing off receivables against an allowance and found none we could verify as current and relevant, so this article uses ordinary citations instead.