Invoice Write-Off
Invoice Write-Off
An invoice write-off removes uncollectible customer debt from accounts receivable, maintaining accurate financial reporting and tax compliance.
January 24, 2026
What is an Invoice Write-Off?
An invoice write-off is an accounting procedure where a business formally recognizes that a customer invoice won't be collected and removes it from accounts receivable. When you write off an invoice, you debit bad debt expense and credit accounts receivable, acknowledging the loss on your income statement while reducing what customers owe you on the balance sheet.
This differs from a write-down, where you expect partial payment at a reduced amount. A write-off assumes zero recovery.
Why It Matters
Invoice write-offs serve three essential functions for finance and billing teams:
Financial accuracy. Carrying uncollectible invoices inflates your accounts receivable, distorts days sales outstanding calculations, and misleads stakeholders about your actual financial position. Write-offs keep your balance sheet honest.
Tax compliance. Tax authorities allow bad debt deductions, but only with proper documentation. Writing off uncollectible invoices reduces your taxable income while meeting GAAP or IFRS requirements for financial reporting.
Resource allocation. Billing teams waste time and money pursuing debts that will never be collected. Write-offs let you stop chasing dead accounts and focus collection efforts where they can succeed.
When to Write Off an Invoice
Not every overdue invoice qualifies for write-off. Common triggers include:
Customer bankruptcy or insolvency. Legal bankruptcy proceedings make collection virtually impossible. In US Chapter 7 liquidation bankruptcy, unsecured creditors typically receive little to nothing after secured creditors and priority claims are satisfied. Similar protections exist under insolvency laws in other jurisdictions.
Persistent non-payment after collection attempts. If automated reminders, personal outreach, payment plan offers, and final notices all fail, continued pursuit becomes counterproductive. Many companies establish thresholds based on days past due before considering write-off.
Billing errors that can't be corrected. Sometimes the invoice itself is fatally flawed—wrong legal entity billed, incorrect tax calculations, services never authorized, or contract disputes that can't be resolved. Rather than carry an invalid receivable indefinitely, write it off.
Customer has disappeared. For smaller balances, the cost of legal action may exceed the debt value. If emails bounce, phone numbers disconnect, and business registrations lapse, recovery becomes unlikely.
How It Works
The write-off process involves several steps to ensure compliance and maintain clean records:
Two Accounting Methods
Direct write-off method records bad debt expense when you determine the invoice is uncollectible:
This method is simpler and commonly used for tax purposes, but it violates the matching principle under GAAP because you recognize the expense in a different period from the revenue.
Allowance method estimates uncollectible accounts in advance, creating an allowance for doubtful accounts:
This approach matches expenses to revenues in the same period and is required under GAAP and IFRS for financial reporting.
Execution Steps
Review aging reports to identify invoices past your write-off threshold
Document collection efforts with email correspondence, call logs, payment offers made, and legal notices sent
Create the journal entry using either the direct write-off or allowance method
Issue a credit memo referencing the original invoice number, reason for write-off, date, and approving authority
Close the invoice in your billing system with proper status designation and audit trail notes
Verify financial impact on balance sheet, income statement, and cash flow projections
Implementation Considerations
Establish Clear Policies
Document specific write-off criteria before you need them:
Timing thresholds based on days past due
Amount thresholds for automatic vs. manual approval
Approval authority matrix by dollar amount
Documentation requirements for audit purposes
Recovery procedures if a written-off customer later pays
International Differences
US companies typically use the direct write-off method for tax purposes while maintaining an allowance method for GAAP reporting. Companies following IFRS must use the expected credit loss model under IFRS 9, which requires estimating lifetime expected credit losses.
Tax treatment varies by jurisdiction. US companies must report canceled debt over $600 on IRS Form 1099-C. EU companies must consider VAT implications and GDPR data retention requirements when writing off international invoices.
Preventive Measures
Billing systems like Meteroid can reduce write-offs through:
Credit checks on new enterprise accounts before extending terms
Payment method collection upfront to enable automated retry logic
Conservative credit limits for high-risk customer segments
Automated dunning sequences that escalate appropriately
Risk scoring based on payment history and customer attributes
Common Challenges
Writing off too early. Some customers pay very late but eventually pay. Track historical recovery rates by aging bucket before setting write-off thresholds. Premature write-offs leave money on the table.
Inadequate documentation. Poor documentation leads to failed audits, rejected tax deductions, and compliance issues. Maintain a complete paper trail for every write-off decision.
Ignoring patterns. Write-offs reveal systemic issues. High write-offs in specific industries suggest credit risk concentration. First-month failures indicate onboarding problems. Payment method patterns show infrastructure issues. Treat write-offs as business intelligence, not just losses.
Missing partial recovery opportunities. Before executing a full write-off, consider payment plans, partial settlements, or service credits. A structured negotiation may recover more than writing off the entire balance.
When to Use Write-Offs
Execute invoice write-offs when:
Customer bankruptcy proceedings confirm insolvency
Collection efforts have failed completely
The invoice contains uncorrectable billing errors
The customer has disappeared and recovery costs exceed the debt amount
Carrying the receivable distorts your financial reporting
Your write-off policy thresholds have been met
Don't write off invoices that are simply late but show signs of eventual payment, such as customers actively communicating about payment challenges or making partial payments on schedule.