How to Handle Bad Debt and Write-Offs in Your Accounts

No matter how carefully you vet clients or diligently chase invoices, some debts won't get paid. A client goes out of business. A dispute drags on. A small invoice costs more to pursue than it's worth.

Handling bad debt write-offs correctly matters. Get it wrong and your financial statements mislead you, overstate your assets, and create tax trouble.

What counts as a bad debt?

A bad debt is money owed to you that you realistically won't collect. It shifts from assets (accounts receivable) to losses (an expense reducing profit).

The distinction is important. A customer who pays three months late isn't a bad debt — they're a late payer. A bad debt is where collection is realistically unlikely.

When to write off a bad debt

There's no universal rule, but common indicators include:

The customer has gone into administration, liquidation, or insolvency
You've exhausted reasonable collection efforts with no response
You're disputing the debt and there's no realistic legal remedy
The debt is very old (12+ months with no contact or payment)

The tension is real: write off too quickly and you lose a potentially recoverable debt. Write off too slowly and your accounts receivable overstate what you'll actually get. Use your judgment. When uncertain, provisioning (estimating) is safer than writing off.

How to write off a bad debt

Document the decision first. Before writing anything off, document why you believe it's irrecoverable: What collection efforts did you make? How did the customer respond (or not)? Is there evidence of financial difficulty? Why would further pursuit be futile?

HMRC and your auditors will ask, and getting your accounting details right from the start makes these conversations easier.

Record the write-off. The accounting entry is straightforward:

Debit: Bad Debt Expense (reduces profit)
Credit: Accounts Receivable (removes the debt)

After this entry, the invoice vanishes from receivables. Assets and profit both decrease by the write-off amount.

In accounting software like Relentify, this is typically one click — a write-off function that generates the correct entries and marks the invoice as written off automatically. When handling refunds and returns, the same principle applies: get the debit and credit right.

Handle the tax implications. Bad debts are generally tax-deductible (reducing taxable profit). HMRC requires:

The income was previously included in your taxable profits
You can demonstrate the debt is genuinely irrecoverable
You've made reasonable collection efforts

HMRC's rules on business bad debts spell this out clearly.

If you're VAT-registered, you may reclaim the VAT portion — but only if the debt is at least six months old and written off in your accounts. This is called VAT bad debt relief.

Bad debt provisions

A provision (also called an allowance for doubtful debts) is different from a write-off. It's your estimate of debts that might not be collected, made before you're certain they're lost.

Why provision? Without provisions, your profit looks artificially high all year, then drops sharply when you write off the bad debt. Provisions match the expected loss to the period when the sale happened, giving a more honest picture.

How to calculate. Two methods are common:

Specific approach: Review each old invoice individually. Flag invoices from customers in financial difficulty, disputed invoices, and very stale ones for a provision.

General approach: Apply a percentage to all receivables based on historical experience. If 2% of your receivables historically go bad, provision 2% of what you're owed today.

Most businesses mix both: specific provisions for known problem debts, a general provision for the rest.

Recording and adjusting. The entry to create a provision:

Debit: Bad Debt Expense
Credit: Provision for Doubtful Debts (a contra-asset account)

The provision sits on your balance sheet as a reduction from gross receivables, showing the net amount you expect to collect. At each reporting date, adjust it: increase if more debts look doubtful, decrease if previously doubtful debts are collected, write off if a provisioned debt is confirmed bad.

How to prevent bad debt

Prevention is cheaper than write-offs. Every £1 written off requires roughly £10 in extra revenue (at 10% margins) just to replace the lost profit.

Credit checks. Run them for new customers or large orders. A small upfront cost prevents a large write-off later.

Clear payment terms. State them in contracts, proposals, and invoices. No ambiguity.

Deposits and milestone payments. For big projects, take a deposit before starting and milestone payments during. This limits your exposure.

Credit limits. Set a maximum outstanding balance per customer. Don't exceed it without review.

Invoice fast, chase fast. Invoice immediately after completing work. Chase overdue payments immediately. Age kills collectability — the longer money is owed, the less likely you'll collect it.

Monitor your aged debtors. Review your aged debtors report weekly or monthly. Any invoice sliding into older age brackets needs attention. If you're not monitoring your cash flow forecast already, this is your first step. For ongoing sound preventive practices, this report is your insurance policy.

Frequently Asked Questions

Can I write off a bad debt if the customer might still pay?

Not really. A write-off says the debt is irrecoverable. If there's a realistic chance of payment, provision it instead. Write-offs are for debts where you've genuinely given up. If payment arrives later, record it as a recovery (income in that period), not as a reversal.

Do I need the customer's permission to write off their debt?

No. A write-off is an accounting decision, not legal forgiveness. You're recognising that you won't collect it. The customer's agreement is irrelevant — if you've decided it's irrecoverable, you can write it off.

Is there a time limit on pursuing a debt?

Yes. In the UK, most debts have a six-year limitation period from the date of the debt or last acknowledgement. After six years, if you haven't taken legal action, it becomes statute-barred (legally unenforceable). You still can't sue, but you can write it off.

What's the difference between bad debt and a discount?

A discount is a reduction in the invoice price (decided at sale). Bad debt is a loss recognised later when payment fails. The customer receives a discount knowingly; bad debt is a loss you incur due to non-payment. They're accounted differently.

Can I write off a personal loan I made to a customer?

Not as a trade bad debt. A bad debt write-off applies to trade receivables (goods or services sold). A personal loan is different — it's a loan, not a trade receivable. Provisions may apply, but tax-deductible relief may not. Consult your accountant.

How often should I review my bad debt provision?

At least at each reporting date (quarterly for monthly accounts, yearly minimum). More frequent reviews give more accurate profit forecasts. If your customer base is volatile, review more often.

What if a customer pays a debt I've written off?

Excellent news. Record it as recovery income:

Debit: Bank/Cash
Credit: Bad Debt Recovered (income)

This recognises the money in the period it arrives, not in the period of the original write-off.

Can I write off just part of a debt?

Yes. If you've settled a dispute for 70% of the original amount and the customer contests the remaining 30%, you can write off the 30%. Just document the settlement. Partial write-offs are common.

Final thought

Bad debt is a cost of doing business. Handle it correctly — with timely recognition, proper accounting, honest disclosure, and preventive practices — and your financial statements stay accurate and your tax position defensible.

But the real win is prevention. The best write-off is the one you never have to make.