Accounts Written Off

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21 Aug, 2024

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Accounts written off refers to accounts receivables that a company has presumed uncollectible and also removed from the general ledger. It helps companies to reduce their accounts receivables statement to only those customers from which it can collect its due amount.

For writing off any uncollectible revenue over one year, the value gets removed from a firm's account and reclassified as bad debt expenses. Writing off does not necessarily mean waiving off an uncollectible amount or debt from the accounts without getting approval for a write-off request from the appropriate authority. Moreover, firms can use direct write-off or allowance methods to deduct the amount from a bad account.

Accounts Written Off Meaning

Accounts written off are receivables that a business has determined uncollectible and has added to its accounts receivables and removed from the general ledger.
It aids businesses in limiting the total number of customers on their statement of accounts receivable from which they can collect their outstanding balance.
The following typical journal entries regarding the uncollectible amount must be made in one's accounts book for written-off accounts to be appropriately recorded- Debit the bad debts expense and credit the accounts receivables.

Accounts Written Off Explained

Accounts written off are those customer invoices that have become uncollectible, so they have been eliminated from the accounts receivables account. Any balance in a firm's accounts receivables shows the amount due to it. If a customer, supplier, or any party fails to pay their dues to the firm, and the firm exhausts all efforts to collect, the firm should write off the outstanding balance.

Therefore, guidelines related to asset/liability reconciliation. The company makes it mandatory to reconcile the accounts receivable item codes monthly because it assumes the posting has been done every month. Reconciliation of accounts receivables must contain the following:

Old list of invoices outstanding
Those amounts agreeing to the general ledger balance

The write-off of an account by a firm can follow two methods – the allowance method or the direct write-off method.

Hence, it's important to note that writing off an account does not erase the debt legally or financially; it merely reflects the acknowledgment that the company believes it is unlikely to recover the amount. Besides, companies may still pursue legal action or engage with debt collection agencies to recover the written-off amounts, depending on the circumstances and the applicable laws and regulations. Additionally, in the USA, companies utilize the direct write-off method of recording accounts written off only for income tax calculations rather than for preparing their financial statements.

According to the allowance method, a company establishes an allowance for doubtful accounts by estimating that it will write off a portion of its accounts receivable and credit sales as uncollectible accounts. Thus, this approach is used solely for financial reporting. Reporting on the balance sheet consequently becomes more realistic.

Examples

Let us use a few examples to understand the topic.

Example #1

Let's say, Winmark Corp, a US company, has five thousand dollars in dues to collect from its customers. But these customers went bankrupt before the company could collect its dues from them. Hence, the bankruptcy-filed customers won't pay the amount of five thousand dollars. In such a scenario, the company can only write off the due amount of five thousand from its general ledger and credit it to its accounts receivables.

The company will credit five thousand by debiting any of the following accounts:

Allowance for doubtful accounts
Bad debts expenses

Example #2

Suppose Vita Coco Company is a small manufacturing company that sells its products to customers on credit. One of their customers, Customer Jack, has been a long-standing client, but they have been experiencing financial difficulties lately. Therefore Jack has an outstanding invoice of $5,000 overdue for several months.

Despite several attempts to contact Jack and request payment, the company has not received a response or compensation. After carefully reviewing the customer's financial situation, Vita Coco determines that the debt is uncollectible.

At the end of the fiscal year, the company decides to write off the bad debt owed by the customer.

Journal Entry:

Debit: Bad Debt Expense $5,000

Credit: Accounts Receivable - Jack $5,000

By recording this journal entry, the firm removes the $5,000 outstanding balance from its accounts receivable, acknowledging that it is unlikely to collect this amount. The bad debt expense account reflects the cost incurred by the company due to the uncollectible debt.

Writing off the account helps the firm present a more accurate financial position, reflecting the realistic value of their accounts receivable and the impact of bad debts on their income.

Accounts Written Off Journal Entry

For proper recording of accounts that get written off, one has to make the following standard journal entries in their accounts book:

Debit the bad debts expense concerning the uncollectible amount.
Credit the accounts receivables with the uncollectible amount.

A journal entry indicates and affirms that the firm will not receive these uncollectible amounts and will not record them as an expense.

Generally, companies have to remove amounts outstanding in the receivables account that has become uncollectible from the accounts receivables. Moreover, any such action affects the balance sheet:

Journal entry for direct write-off method:

Debit Bad Debts Expense (reports the loss on the firm’s income statement)
Credit Accounts Receivable (eliminates the amount that can not be collected)

Journal entry for allowance method:

Debit Bad Debts Expense, & (for credit sales)
Credit Allowance for Doubtful Accounts

However, for recording a particular customer's account as uncollectible then, the journal entry would be:

Credit Accounts Receivable
Debit Allowance for Doubtful Accounts

Recovery Of Accounts Written Off

Sometimes, the business forces the customer or the supplier to pay the uncollectible amount due to court action or personal commitments. Then for accounts written off but recovered cases, the company has to recover the account under the allowance method. To do so following steps have to be taken:

Reverse the write-off entry for recovery of invoices written off a journal entry
Reinstate the accounts written off
Add the amount received with its date on the journal
Process it as per the standards

After taking all these steps, the account receivables have become fully paid, and the business might again want to continue the trade with the concerned customer or supplier of the party.

Hence, it's essential to promptly record the recovery of written-off accounts to maintain accurate financial records. Therefore, this ensures that the company's financial statements provide a clear and up-to-date view of its accounts receivable and bad debt expenses.

Frequently Asked Questions (FAQs)

1. What is the difference between accounts written off and write-downs?

The difference between accounts written off and write-downs is as follows:
In the write-down, the company reduces the asset's value for accounting and taxation purposes. In contrast, the company removes all uncollectible amounts from suppliers, customers, or third parties. Which cannot be collected anymore from its account book in accounts written off.

2. How do I clear my accounts written off from the CIBIL report?

For clearing one’s record of accounts written off from CIBIL. One has to pay the existing dues in full or should be able to pay the dues of settlement as agreed between them and their lenders.

3. What is the impact of accounts written off on financial statements?

Writing off accounts affects both the income statement and the balance sheet. It reduces the income on the income statement due to the bad debt expense and decreases the total accounts receivable balance on the balance sheet.