Bad debt write-off: when and how to do it properly

Every business that gives credit eventually has an invoice that won't be paid. The customer has closed down, disappeared, or simply stopped responding, and the cost of chasing further is more than the debt is worth. At that point, keeping the invoice open on your books doesn't make the money more likely to arrive. It just makes your receivables, and your reports, look better than they are.

Writing off a bad debt is a normal part of credit control. Done properly, it keeps your books accurate and makes sure you don't miss any tax relief you may be entitled to.

What a bad debt is

A bad debt is an amount owed to you that you no longer reasonably expect to collect. It is different from:

• A late payment, which you still expect to receive. See how to reduce late payments.
• A disputed invoice, which should be resolved, often with a credit note, rather than written off. See credit note vs refund.
• A doubtful debt, which you are worried about but haven't given up on yet. Many businesses set aside an allowance for these without writing them off.

Before you write off: exhaust reasonable steps

Write-off should be the end of a process, not a shortcut. Before deciding, check that you have:

1. Sent reminders and statements, and called the customer. See statement of account.
2. Stopped further credit or service, so the debt doesn't grow. See suspending service for non-payment.
3. Sent a formal letter of demand, if the amount justifies it.
4. Considered a payment arrangement or a settlement for part of the amount.
5. Weighed collection options: a debt collector or legal action, against what they would cost.

Keep a record of every step. If you claim tax relief on the debt, you may need to show that you took reasonable steps to collect it.

Decide when a debt is irrecoverable

Common signs that a debt is bad:

• The customer has been liquidated, sequestrated or deregistered.
• The customer can't be traced.
• The cost of further collection exceeds the amount owed.
• The debt has prescribed. In South Africa, most ordinary debts prescribe after three years unless prescription is interrupted. See debt prescription in South Africa.

Set a written bad debt policy so that decisions are consistent: who can approve a write-off, up to what amount, and what evidence is needed.

How to record the write-off

The exact entries depend on your accounting system and your accountant's guidance, but the principles are the same:

• Don't delete or cancel the original invoice. The sale happened, and your records must show it. Deleting invoices also breaks your invoice number sequence. See invoice numbering best practices.
• Record the write-off as a separate entry against the customer's account, to a bad debts expense account, with the date and the reason.
• Keep the evidence of your collection attempts with the write-off record. See audit trails for payments and billing.
• Flag the customer so that nobody gives them credit again without approval.

Your aged receivables report should then no longer show the amount, and your revenue reports stay accurate.

VAT and income tax

If you are a VAT vendor and paid output VAT on the original invoice, the VAT Act provides relief for debts that become irrecoverable and are written off, subject to conditions. Income tax rules also allow deductions for bad debts in certain circumstances. The conditions and timing matter, so ask your accountant or tax practitioner before you claim, and keep the supporting records.

If the customer later pays some or all of a debt you wrote off, record the recovery and account for any VAT or tax relief you claimed on it.

Reduce bad debts next time

Most bad debts can be traced back to how credit was given. Useful habits:

• Agree clear payment terms upfront.
• Take deposits on large or custom jobs. See taking deposits online.
• Prefer automatic collection, such as debit orders or saved cards, for recurring services.
• Follow a credit control process consistently.

How CentraPoint helps

CentraPoint helps you keep debts from going bad in the first place. Invoices carry a pay-by-link so customers can pay immediately, subscriptions retry failed payments with dunning, and debit orders run through Netcash with mandates customers sign online. Standard reports and the report builder show outstanding invoices, with scheduled delivery by email to your finance team.

When a debt is settled or reduced, credit notes record the adjustment without touching the original invoice, the audit log shows who did what, and accounting integrations sync customers, invoices and payments to Sage, Xero, QuickBooks or Zoho Books, where your accountant can record the write-off. See features and pricing.

Frequently asked questions

When should I write off a bad debt?

When you no longer reasonably expect to collect it, after you have taken reasonable steps to recover it. A written policy helps you decide consistently.

Can I still collect a debt after writing it off?

A write-off is an accounting entry; it doesn't by itself cancel the customer's obligation to pay. If money is later recovered, record the recovery and adjust any tax relief you claimed.

Should I cancel the invoice instead of writing it off?

No. The invoice records a real sale. Keep it, and record the write-off as a separate entry so that your records stay complete.