Write Off Bad Debt by Making an Allowance for a Bad Debt Account

You can account for bad debts by regularly making an allowance for bad debt.

As a typical function of accrual accounting, many companies accrue, each month, a bad debt expense amount. This amount is typically a percentage of the specific month’s sales (for example, 3% of sales). The benefit of this method is that you accrue for bad debt at the time of the sale.

To write off bad debt by making a bad debt allowance:

1. Create a Bad Debt Expense account (for example, 759.00) and an Allowance for Bad Debt account (for example, 118.00) in the chart of accounts (Settings > Accounting > Chart of Accounts).
2. Create an accrual-only journal entry file recognizing (or accruing) the expense.

   Typically, you debit the Bad Debt Expense account and credit the Allowance for Bad Debt account.

3. Use one of the following approaches to associate the bad debt with a specific project:
   • Write Off Bad Debt Using a Negative Invoice
   • Write Off Bad Debt Using Cash Receipts and an Indirect Expense Account
   • Write Off Bad Debt Using Cash Receipts and a Bad Debt Direct Expense Account
4. Reverse the accrual-only journal entry created in step 2, for the total amount of the recognized bad debt created in step 3.