Direct write-off vs allowance method.
Two methods exist. Direct write-off: when a specific invoice is confirmed uncollectible, post DR Bad Debt Expense / CR Accounts Receivable. Simple, but it concentrates the expense in the period of recognition rather than the period of sale, which violates the matching principle. Allowance method: estimate doubtful accounts each period and post DR Bad Debt Expense / CR Allowance for Doubtful Accounts. When a specific invoice is later written off, post DR Allowance / CR Accounts Receivable. P&L impact was already taken in the period of sale.
tax law (Section 29 of the your country’s tax code) generally requires actual write-off, not provisions, for the deduction. So most SMBs use the allowance method for management accounts and the direct method for tax. Both methods coexist in the same books with reconciling entries. Nonari handles the dual track automatically.
The actual journal entries.
Allowance creation, period-end estimate of $180,000: DR Bad Debt Expense 180,000 / CR Allowance for Doubtful Accounts 180,000. The allowance shows on the balance sheet as a contra-asset under AR, reducing net AR. When customer X is confirmed dead with a $75,000 balance: DR Allowance for Doubtful Accounts 75,000 / CR Accounts Receivable - Customer X 75,000. No P&L impact, because the expense was already taken via the allowance.
If the customer later pays (rare but happens): DR Cash 75,000 / CR Bad Debt Recovery 75,000 (or CR Allowance, depending on policy). Sales tax adjustment if eligible: DR Output Tax 12,750 / CR Bad Debt Expense or specific GL account. The tax recovery is real cash flow back, do not skip the entry just because it is small.
When a debt qualifies as bad.
For Section 29 deduction, three conditions must be satisfied. The debt must have been included in income previously (a trade receivable from a sale, yes; a personal loan to a director, no). The debt must actually be written off in the books in the same tax year you claim. The debt must be such that, in the opinion of the taxpayer, no reasonable prospect of recovery exists. The third is subjective but auditors expect evidence: legal notices, customer business closed, traceable absconding, court rejected, agency exhausted.
Rule of thumb for evidence: at least two of the following. (1) Customer business closed (gazette notice or visit confirmation). (2) Customer not reachable for 90+ days despite documented attempts. (3) Legal notice issued under acknowledgment, no response. (4) Court decree against customer with no recovery. (5) Negotiated settlement at less than face value (write off the difference). With this paper trail, the deduction is defensible.
Sales tax adjustment under Section 9.
When you sell on credit, you charge output tax and remit it on your sales tax return even before the customer pays. If the customer never pays, you have remitted tax on a sale that produced no cash. Section 9 of the your sales tax law allows an adjustment if the debt is over 180 days, the supply was made to a registered person, and the supply has been written off in the books of accounts. The adjustment is claimed in the your sales tax return of the period in which the write-off occurs.
A worked example: $200,000 invoice with 17% sales tax of $34,000, sold to a registered customer in October. Customer absconds, written off in May. your sales tax return for May claims a Section 9 adjustment of $34,000 against output tax. Net impact: bad debt expense of $200,000 in P&L, output tax recovery of $34,000 in the return, real cash recovered to that extent. Nonari computes eligibility automatically and pre-fills the Section 9 adjustment line.
Avoid the common owner mistakes.
Mistake one: writing off because "the customer is difficult." Difficulty is not uncollectibility. Document specific evidence. Mistake two: writing off small amounts without record. $8,000 may seem trivial, but a hundred such write-offs across a year add up to $800,000 of unjustified expense. Mistake three: writing off a related-party balance to manipulate profit. your tax authority has explicit anti-avoidance rules under the relevant statute for related-party transactions.
Mistake four: writing off in the wrong year. Section 29 requires the write-off in the year you claim the deduction. Writing off in March 2026 and claiming in 2025 fails. Mistake five: not telling the customer. Sometimes a written-off customer surprises you with payment. If your AR system shows zero balance and you receive $75,000, post it as bad debt recovery, not a duplicate sale.
Recovery accounting after write-off.
A written-off customer pays $50,000 against an old $200,000 invoice. Three options. Option A (clean P&L): DR Cash 50,000 / CR Bad Debt Recovery 50,000. The recovery hits this period income. Option B (against allowance): DR Cash 50,000 / CR Allowance for Doubtful Accounts 50,000. The allowance is replenished for future write-offs. Option C (reverse and reapply): DR AR Customer X 50,000 / CR Allowance 50,000, then DR Cash / CR AR. Same net effect.
For tax, the recovery is taxable income in the year received under Section 29(3). If the original write-off was claimed as a deduction, the recovery is income. If the original write-off was disallowed by your tax authority, the recovery is not taxable (no double dip). Track the linkage so you can explain to the auditor.
Closing the loop with credit policy.
Write-offs are the cleanup; the prevention is upstream. Customers who become bad debts are usually visible 90 days before the write-off. Credit limits set at onboarding, enforced at order entry, prevent most of it. Aging reviews catch the rest. A bad debt ratio of more than 1.5% of credit sales is a credit policy problem, not a collection problem.
Set the credit limit, enforce it in the order system (Nonari blocks new orders for customers over 60 days past due unless an override is logged), review the aging weekly, escalate per the dunning ladder. With this loop in place, write-offs become rare and predictable. Without it, write-offs are surprise hits to the P&L every quarter.