How to Record a Write-Off: Bad Debt, Inventory, and Fixed Assets

To record a write-off, you post a journal entry that removes the worthless balance from the asset account and books the loss to an expense or contra-asset account. The exact entries for how to record a write-off depend on what you’re writing off (a bad debt, obsolete inventory, or a retired fixed asset) and, for bad debts, whether you use the allowance method or the direct write-off method.

Bad Debt Write-Off Entries

Before posting anything, confirm the invoice number, customer name, exact dollar amount, and the date you’re treating as the determination date. That date controls which fiscal period absorbs the entry.

Direct Write-Off Method

The direct method records bad debt expense only when a specific account is confirmed uncollectible. It’s the approach the IRS expects for tax purposes under IRC Section 166, which allows a deduction only when a debt becomes wholly or partly worthless.¹ The entry is a single step:

Debit Bad Debt Expense for the full uncollectible amount.
Credit Accounts Receivable for the same amount.

The debit increases operating expenses and reduces net income. The credit pulls the customer’s balance off your books and off your aging report.

The tradeoff is timing. You might recognize revenue in January and not record the related bad debt expense until September, which distorts both periods. For that reason, the direct method is common on tax returns but not accepted under Generally Accepted Accounting Principles for financial reporting.

Allowance Method

The allowance method is the GAAP standard because it records estimated losses in the same period as the related revenue. You set up a contra-asset account called Allowance for Doubtful Accounts, which reduces the reported value of accounts receivable on the balance sheet. When a specific customer’s debt proves uncollectible, you draw down that reserve instead of recording a new expense.¹

The write-off entry is:

Debit Allowance for Doubtful Accounts, drawing down the reserve.
Credit Accounts Receivable, removing the customer’s balance.

This entry doesn’t touch the income statement. The expense hit already happened when you recorded the original allowance estimate, which is the whole point of the method. If a write-off would push the allowance balance below zero, you need an additional adjusting entry to replenish it, and that entry does hit Bad Debt Expense.

Recording a Recovery After a Write-Off

Customers occasionally pay debts you’ve already written off. You can’t just deposit the check: the accounting needs to reverse the write-off first, then record the payment.

Under the allowance method, it’s two steps:

Reinstate the receivable: debit Accounts Receivable, credit Allowance for Doubtful Accounts for the amount recovered.
Record the payment: debit Cash, credit Accounts Receivable for the same amount.

Under the direct write-off method, the reinstatement entry debits Accounts Receivable and credits Bad Debt Recovery (or Bad Debt Expense, if your system uses that account for reversals). Then you record the cash receipt as usual. Either way, the customer’s payment history gets properly documented, which matters if they come back as a client later.

Estimating the Allowance Balance

The allowance-method write-off entry only works if there’s a reserve to draw down. Two techniques dominate for setting that reserve.

Percentage of Credit Sales

Apply a flat percentage to each period’s credit sales based on your historical collection experience. If your track record shows roughly 2% of credit sales eventually go unpaid, multiply that period’s credit sales by 2% and record the result as a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts. Simple, but it doesn’t respond to shifts in the age or quality of your current receivables.

Aging of Receivables

Sort outstanding invoices into time buckets and apply progressively higher loss percentages to older balances. A common structure:

0–30 days past due: 1% estimated uncollectible.
31–60 days past due: 5% estimated uncollectible.
61–90 days past due: 15% estimated uncollectible.
Over 90 days past due: 30% or higher.

The exact percentages come from your own collection history. Multiply each bucket’s outstanding balance by its estimated loss rate and sum the results. That total becomes your target balance for the Allowance for Doubtful Accounts. The adjusting entry is the difference between that target and the account’s current balance. Auditors tend to prefer this method because it responds to real-time changes in receivable quality.

Inventory Write-Off Entries

Inventory that’s damaged, obsolete, or stolen also needs to come off the books. Under GAAP, inventory must be carried at the lower of its original cost or its net realizable value, meaning the amount you could actually sell it for, minus disposal costs. When that value drops to zero, the inventory is written off entirely.

Which expense account you use depends on materiality:

Small or one-time losses: debit Cost of Goods Sold, credit Inventory. This buries the loss in your normal COGS line, which is appropriate when the amount is immaterial.
Large or recurring losses: debit a separate Inventory Write-Off Expense account (or Loss on Inventory Write-Down), credit Inventory. A dedicated account keeps the loss visible on the income statement, which matters for management and auditors tracking patterns of waste or obsolescence.

Some businesses maintain an Allowance for Inventory Losses contra-asset account that works just like the bad debt allowance. You estimate expected losses in advance and draw down the reserve when specific items are written off. That approach smooths out the income statement impact and is worth considering if your industry has predictable shrinkage rates.

Fixed Asset Write-Off Entries

When equipment, vehicles, or other fixed assets are retired, destroyed, or abandoned, the write-off entry needs to clear both the asset’s original cost and its accumulated depreciation. If the asset isn’t fully depreciated, the remaining book value becomes a loss.

For a fully depreciated asset with no salvage value:

Debit Accumulated Depreciation for the full amount of depreciation taken over the asset’s life.
Credit Fixed Asset for the original cost.

The two amounts match, so the entry balances with no gain or loss.

For a partially depreciated asset:

Debit Accumulated Depreciation for depreciation taken to date.
Debit Loss on Asset Disposal for the remaining book value.
Credit Fixed Asset for the original cost.

The loss on disposal flows through the income statement. Record depreciation through the disposal date before posting the write-off, or the loss will be overstated.

Book Entry Versus Tax Deduction

A journal entry in your books doesn’t automatically create a tax deduction, and the rules diverge in ways worth flagging.

For a business bad debt, the IRS allows a deduction only if the amount was previously included in your gross income.² Cash-method taxpayers often get tripped up here: if you never recorded the revenue because the customer never paid, there’s nothing to deduct. This mostly affects unpaid salaries, rents, fees, and similar items a cash-basis taxpayer wouldn’t have included in income yet. Sole proprietors report business bad debts on Schedule C (Form 1040). Corporations use Line 15 of Form 1120.³

Personal loans and other nonbusiness bad debts follow different rules: they’re deductible only if totally worthless, partial write-offs aren’t allowed, and the loss is reported as a short-term capital loss rather than an ordinary deduction.²

Whichever category applies, the deduction belongs in the year the debt became worthless. You don’t have to wait until the debt is past due if circumstances clearly show no reasonable expectation of repayment: bankruptcy, business closure, exhausted collection efforts.²

Documentation Behind the Entry

A write-off that can’t be supported during an audit is a write-off that gets reversed. Keep the following for every bad debt you write off:

Original invoices or loan agreements proving the transaction and amount owed.⁴
Dated collection records: demand letters, email chains, phone logs, correspondence. The IRS expects you to show reasonable collection steps before writing the debt off.²
Evidence of worthlessness: bankruptcy filings, returned mail, defunct business records, or a court judgment showing the debtor can’t pay. You don’t need to go to court if you can demonstrate a judgment would be uncollectible anyway.²
Internal approval: a memo or form signed by a manager or owner confirming the write-off was reviewed and authorized. This protects against both audit challenges and internal fraud.

The standard IRS record retention period is three years from the filing date. Bad debt deductions get a longer leash: keep supporting documentation for at least seven years from the due date of the return for the year the debt became worthless, because that’s how long you have to file an amended claim.⁵⁶

1
Office of the Law Revision Counsel. 26 USC 166 – Bad Debts
2
Internal Revenue Service. Topic No. 453, Bad Debt Deduction
3
Internal Revenue Service. Instructions for Form 1120
4
Internal Revenue Service. Publication 583, Starting a Business and Keeping Records
5
Internal Revenue Service. Topic No. 305, Recordkeeping
6
Office of the Law Revision Counsel. 26 USC 6511 – Limitations on Credit or Refund