Write Off Bad Debt by Making an Allowance for a Bad Debt Account
The fourth method to write off bad debt is to accrue for bad debt using an allowance for bad debt account.
As a typical function of accrual accounting, many companies will 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 are accruing for the bad debt and the time of the sale.
To write off bad debt using a bad debt account, complete the following steps:
- Create the Bad Debt Expense account (for example, 759.00) and the Allowance for Bad Debt account (for example, 118.00) in the Chart of Accounts Info Center.
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Create an accrual-only journal entry file recognizing (or accruing) the expense.
Typically, you debit the Bad Debt Expense account (759.00) and credit the Allowance for Bad Debt account (118.00).
- Follow the steps outlined in method 1 (negative invoice), method 2 (cash receipts and direct expense account), or  method 3 (cash receipts and indirect expense account) to recognize the bad debt to a specific project.
- Reverse the accrual-only journal entry created in step 2, for the total amount of the recognized bad debt created in step 3.