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:

1. 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.
2. 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).

3. 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.
4. Reverse the accrual-only journal entry created in step 2, for the total amount of the recognized bad debt created in step 3.