When a customer cannot or will not pay, the business writes the debt off: debit irrecoverable debts (an expense) and credit the customer’s receivables account. The customer’s balance goes to nil and profit falls by the amount written off.
This skill sits at the start of receivables and allowances and links straight to the double-entry rules in the ledger trainer.
Why does a write-off need two entries?
When the business made the credit sale, it recorded an asset: money owed to it. Receivables are an asset only while the business can expect to collect the cash.
Once the money is judged lost, two things change. The asset is smaller, so the customer’s account is credited. The business has also suffered a loss, so an expense is debited.
Every entry still has one debit and one credit of equal value.
How to record the write-off, step by step
- Identify the customer and the exact amount that will not be collected. Take it from the notice or the instruction in the question.
- Debit irrecoverable debts. This is an expense account, and it will be carried to the income statement.
- Credit the customer’s account in the receivables ledger.
- Check the customer’s balance. If the whole balance is written off, the account closes at nil.
- Transfer the total expense from irrecoverable debts to the income statement at the end of the period.
Worked example
Seri Murni Hardware sold goods on credit to Tan Brothers for RM640 on 15 March. On 30 September, the owner learns that Tan Brothers has closed and cannot pay. The full RM640 is written off.
Step 1: the amount is RM640 and the customer is Tan Brothers.
Step 2: debit Irrecoverable debts RM640.
Step 3: credit Tan Brothers RM640.
The two ledger accounts look like this.
| Tan Brothers (receivables ledger) | RM | RM | |
|---|---|---|---|
| 15 Mar Sales | 640 | 30 Sep Irrecoverable debts | 640 |
| 640 | 640 |
| Irrecoverable debts | RM | RM | |
|---|---|---|---|
| 30 Sep Tan Brothers | 640 | 31 Dec Income statement | 640 |
| 640 | 640 |
Debits equal credits in each account, and the entry has one debit (RM640) and one credit (RM640). The shop’s profit for the year is RM640 lower than if Tan Brothers had paid.
What if some of the money comes back later?
Suppose Tan Brothers’ owner sells equipment and pays RM150 in November. Two steps record it. First reinstate the amount: debit Tan Brothers RM150 and credit Irrecoverable debts recovered RM150.
Then record the cash: debit Bank RM150 and credit Tan Brothers RM150.
The first step shows the recovery as income. The second step is the normal receipt of cash. The customer’s account ends at nil again.
The mistake to watch for
A frequent slip is to credit the bank, or to debit the sales account, because “the sale did not really happen”.
Mistaken entry: debit Sales RM640, credit Tan Brothers RM640
The student reasoned that the sale should be cancelled.
The sale did happen, and the goods left the shop.
The loss is a cost of doing business on credit, not a cancelled sale. Use the expense account, irrecoverable debts. Debiting sales would understate revenue instead of showing the loss as an expense.
Check yourself
Try these on paper first, then open each answer.
1. A customer’s account shows RM275 owing and the owner decides it will never be paid. Write the double entry.
Show answer
Debit Irrecoverable debts RM275. Credit the customer’s account RM275.
2. By how much does profit change because of the write-off in question 1, and what happens to total receivables?
Show answer
Profit falls by RM275 because an expense of RM275 is recorded. Total receivables also fall by RM275.
3. A receivables ledger total was RM12,400. Two debts of RM275 and RM125 are then written off. What is the new total?
Show answer
RM12,400 − RM275 − RM125 = RM12,000.
Where this leads next
The next lesson moves from a single known loss to a prudent estimate: calculate an allowance from a supplied policy. When you want to practise both together, use the receivables and allowances practice set.
Students often understand the T-account once it is drawn but hesitate when a question gives only a sentence. That is a good place for an experienced teacher to work with you in online one-to-one Accounting tuition.