Bad Debt Write-Off and Recovery: Journal Entries Made Simple

A bad debt write-off removes a customer balance you no longer expect to collect. Under the allowance method, debit Allowance for Credit Losses and credit Accounts Receivable, so no new expense is recorded. Net receivables stay the same. If the customer pays later, reinstate the balance, then record the cash.

Understanding the sequence prevents two common errors: recording the loss twice and treating a recovery as new sales revenue. The main examples use the allowance method for trade receivables, which are amounts customers owe from ordinary credit sales. The allowance is a contra asset, meaning an account that reduces an asset on the balance sheet. We’ll also cover the direct write-off method, when to write off an account, and the tax rules.

Key takeaways

• A bad debt write-off removes a specific customer balance you no longer expect to collect.
• Under the allowance method, debit Allowance for Credit Losses and credit Accounts Receivable. Net receivables and net income don’t change.
• Under the direct write-off method, debit Bad Debt Expense and credit Accounts Receivable. U.S. GAAP doesn’t allow this method for material amounts.
• In the two-entry recovery sequence, reinstate the receivable, then record the cash. Collection lowers net receivables and raises cash by the same amount.
• For federal income tax, most businesses deduct a specific bad debt when it becomes worthless, not when the allowance is estimated.

What is the difference between estimating, writing off, and recovering bad debt?

Credit Loss Expense is often called Bad Debt Expense. Allowance for Credit Losses is also called Allowance for Doubtful Accounts. Different labels don’t change which account belongs in each entry. The allowance is built on expected credit losses, an estimate of what customers won’t pay. FASB’s current model for this is called CECL (current expected credit losses), and it’s found in ASC Topic 326.

The allowance method and direct write-off comparison explains why only the latter debits expense when a specific account is removed. Do not combine entries from the two methods.

When should a company write off a bad debt?

Write off an account in the period it’s deemed uncollectible. That’s the test in FASB ASC 326-20-35-8, and that paragraph doesn’t set a specific number of days past due.

A customer bankruptcy or failed collection efforts can support that decision. The company doesn’t have to wait until every possible collection step has been tried. A write-off also doesn’t mean collection efforts must stop.

How do you record a bad debt write-off? A worked example

Hypothetical example. Harbor Print has $58,000 of gross receivables and a $4,600 credit allowance. It determines that a customer’s $1,200 balance is uncollectible. Assume no other activity or change in the expected-loss estimate at that moment.

The customer’s balance becomes zero. The allowance decreases because part of the expected loss has now been associated with a particular receivable. Cash is unaffected.

Gross receivables (the total customers owe) and the allowance both drop by $1,200. Net receivables, meaning gross receivables minus the allowance, stay at $53,400. So the write-off itself changes neither net income nor net receivables.

One caution: a customer default can still lead to more expense later. New information may mean you need to raise your loss estimate for the remaining receivables. That’s a separate entry, not part of the write-off.

What is the direct write-off method?

The direct write-off method skips the allowance. The company records an expense only when a specific account goes bad. Using Harbor’s $1,200 customer balance, the entry would be:

U.S. GAAP doesn’t allow this method for material amounts, because the expense often lands in a later period than the sale and receivables are overstated in the meantime. Under this method, net receivables and net income both fall when the account is written off.

How do you record the recovery of a written-off account?

Suppose the customer unexpectedly pays the entire $1,200 later. Harbor uses the two-entry sequence commonly taught in accounting courses: put the balance back on the books, then record the cash.

Step 1: Reinstate the customer balance

This reverses the earlier write-off. Gross receivables return to $58,000 and the allowance returns to $4,600. Net receivables are still $53,400 immediately after reinstatement.

Step 2: Record the payment

After collection, gross receivables are $56,800 and the allowance is $4,600. Net receivables are now $52,200, while cash has increased by $1,200. The recovery sequence itself does not change total net assets or net income before any separate allowance reassessment.

This is a useful distinction: reinstatement leaves net receivables unchanged, but collection reduces net receivables and increases cash. Saying that the entire recovery leaves net receivables unchanged would be incorrect.

How does a recovery affect net income?

The two recovery entries illustrated here do not affect net income by themselves. Any income effect arises through an adjustment of the allowance estimate. Under CECL, that estimate includes expected recoveries, so the related income effect can occur before cash is collected.

Harbor’s allowance is now $4,600 on $56,800 of gross receivables. Suppose that at the next reporting date, with no other activity, Harbor’s supported estimate of expected losses is $3,400. The allowance is $1,200 too high, so Harbor reduces it:

Net receivables return to $53,400 ($56,800 minus $3,400), and credit loss expense for the period drops by $1,200. In this example, the income effect arises from the allowance adjustment rather than from the two recovery entries. The cash receipt is not new sales revenue.

Worth knowing: FASB’s own illustration (ASC 326-20, Example 9) records the cash against the allowance, then adjusts the allowance to the current estimate at the reporting date. It’s a different path to the same idea: the recovery runs through the allowance, not revenue.

What if only part of the account is recovered?

Change the recovery assumption: the customer pays only $450 of the $1,200 written-off balance. If that $450 is the amount being recovered, reinstate $450 and then collect $450. The remaining $750 stays written off unless facts support another action.

Debit Accounts Receivable and credit Allowance for Credit Losses for $450. Then debit Cash and credit Accounts Receivable for $450. The restored customer balance is cleared by the receipt. No new Sales Revenue is credited because the original sale was recorded earlier.

The allowance continues to carry forward. At the next reporting date, update it to the supported expected-loss estimate using the remaining receivables. The accounts receivable aging calculation shows how to determine that later adjustment.

Is a bad debt write-off tax deductible?

Often, yes, but tax rules work differently from book rules.

For financial statements, the expense usually comes first, when the company estimates its allowance. For federal income tax, most businesses can’t deduct that estimate. They use the specific charge-off method, which means deducting a specific debt when it becomes worthless, in whole or in part, under IRC Section 166.

Three rules to remember:

• The amount must already be in income. An accrual-method business that reported the sale can generally deduct it. A cash-method business that never reported the sale as income generally can’t deduct the unpaid invoice.
• Timing matters. A debt is deducted in the year it becomes worthless, and the business should be able to show it took reasonable steps to collect. A partly worthless business debt can be deducted only up to the amount charged off that year.
• Recoveries can be taxable. If a deducted debt is collected later, the recovery is generally income to the extent the earlier deduction reduced tax. This is the tax benefit rule in IRC Section 111.

Because book expense usually comes before the tax deduction, the allowance creates a temporary difference that typically results in a deferred tax asset. For the IRS summary, see IRS Topic No. 453.

Common mistakes and control checks

• Debiting expense at an allowance-method write-off. Use the allowance instead.
• Crediting revenue when cash is recovered. The recovery settles an earlier receivable; it is not another sale.
• Reinstating the entire balance for a partial recovery without supporting facts. Match the illustrated reinstatement to the amount being recovered.
• Assuming a write-off means collection efforts must legally stop. Accounting removal and enforceability are different questions.

Control checks

• Separate duties. The person who handles cash shouldn’t also record receivables or approve write-offs. This helps prevent lapping, where an employee steals one customer’s payment and hides it using later receipts from other customers.
• Keep support for each write-off, including the collection attempts and who approved it.
• Keep a record of written-off accounts so a later recovery can be matched to the right customer.

For a journal-entry problem, label the event first. Then check which accounts change, whether cash moves, and whether a separate estimate adjustment is requested. This short routine is more reliable than memorizing a single debit for every bad-debt transaction.

How is a bad debt write-off tested on the CPA Exam?

The FAR section of the CPA Exam covers calculating trade receivables and allowances and preparing the journal entries. A common format is the allowance rollforward, a schedule that walks the balance from beginning to end. You get most of the pieces and solve for the missing one.

Example: The allowance starts with a $4,000 credit balance. Write-offs are $3,000, recoveries are $500, and the required ending allowance is $6,000. What is credit loss expense?

Exam trap: Write-offs reduce the allowance and recoveries increase it, but neither one is an expense. If write-offs push the allowance to a debit balance, add that balance to the required ending amount. For example, with a $500 debit balance and a required $2,000 credit balance, credit loss expense is $2,500.

Practice questions with explanations

1. Write off a customer account

2. Calculate net receivables after a write-off

3. Record a $300 partial recovery

Frequently asked questions

Does a write-off reduce net income?

Under the allowance method, no. The write-off only reduces Accounts Receivable and the allowance. Net income drops when the company records credit loss expense to build the allowance.

Why reinstate an account before collecting it?

The two entries restore the customer ledger balance and then show its settlement. They preserve a clear record of the recovery.

Is recovery revenue?

No. The cash relates to a sale already recognized, so no new sales revenue is recorded. The illustrated recovery entries affect Accounts Receivable, Cash, and the allowance. Any income effect arises through an adjustment of the allowance estimate, which includes expected recoveries under CECL.

What is the journal entry for a bad debt write-off?

Under the allowance method, debit Allowance for Credit Losses and credit Accounts Receivable for the amount being removed. Under the direct write-off method, debit Bad Debt Expense and credit Accounts Receivable.

When should a bad debt be written off?

Write it off in the period the account is deemed uncollectible, which is the test in FASB ASC 326-20-35-8. The company doesn’t have to wait until every possible collection step has been tried.

Is a bad debt write-off tax deductible?

Often, yes, for a business that already included the amount in income. A business generally deducts the debt in the year it becomes worthless, in whole or in part. A cash-method business that never reported the sale as income generally can’t deduct the unpaid invoice.

What is the difference between bad debt expense and a bad debt write-off?

Bad debt expense is the estimated cost of customers who won’t pay, recorded on the income statement. A write-off removes one specific customer balance from the books. Under the allowance method, the expense comes first and the write-off comes later.

Accounting references: FASB ASC Topic 326 (Financial Instruments, Credit Losses), Subtopic 326-20 (Measured at Amortized Cost), including paragraph 326-20-35-8 on write-offs, paragraph 326-20-30-1 on expected recoveries, and Example 9 on write-offs and recoveries. ASU 2025-05 added an optional simplification for estimating losses on current accounts receivable and current contract assets arising from transactions under ASC 606, effective for annual periods beginning after December 15, 2025. It changes how the estimate can be made, not the write-off entries above.

Tax references: IRC Section 166, IRC Section 111, and IRS Topic No. 453.

This lesson addresses trade receivables. All numerical examples and practice questions are hypothetical.

For more worked examples and practice, explore the Intermediate Accounting course. New to receivables? Start with What Is Accounts Receivable? Preparing for FAR? Practice with the FAR Test Bank. Want the tax side? See the Individual Income Tax course.

About the Author

Mansour Farhat, CPA, CIA, DBA, is the instructor behind Farhat Lectures. He teaches accounting and CPA Exam topics through video lessons on farhatlectures.com and the Farhat Lectures YouTube channel.