Accounts written off definition
/What are Accounts Written Off?
Accounts written off are those invoices to customers that are considered uncollectible, and which have therefore been removed from the accounts receivable account. Doing so reduces the accounts receivable report to just those customer invoices that are considered to be collectible. This is a benefit for the collections staff, since uncollectible items are being purged from the accounts receivable report - which they use to determine which customers to call about overdue invoices. Timely write-offs are critical, since they provide management with the most accurate view of collectible trade accounts receivable.
Accounting for Accounts Written Off
Accounts are written off by debiting either the allowance for doubtful accounts or the bad debt expense account, and crediting the accounts receivable account. The debit is to the allowance for doubtful accounts when the company sets up a reserve against invoices that might prove to be uncollectible at some point in the future. The debit is to the bad debt expense account when there is no reserve, and the uncollectible amount is instead being charged directly to expense.
Example of Accounts Written Off
As an example of accounts written off, the collections manager of Amalgamated Hot Cakes finds that a $2,500 invoice to a key customer is not going to be paid. Accordingly, she issues a credit memo to offset and retire the invoice, while debiting the allowance for doubtful accounts to draw down the reserve by an equivalent amount.
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FAQs
What is the Difference Between Writing Off and Forgiving a Debt?
Writing off a debt is an accounting procedure that removes an uncollectible receivable from the company’s books, reflecting it as a loss. Forgiving a debt, on the other hand, is a formal decision to release the debtor from the obligation to repay. While both reduce the receivable, forgiveness is a legal and business decision, whereas a write-off is primarily an accounting adjustment.