Should your business write off bad debt at the end of the year?

Posted by Ryan Howard on Dec 13, 2019 8:15:00 AM

Should your business write off bad debt at the end of the year

The weather has turned colder, holiday shoppers are looking for gift ideas and your Accounting team is cleaning up year-end finances. It's during this time of the year that they're taking a closer look at unpaid accounts receivable invoices and deciding what to do.  Before taking a financial loss, there may still be an opportunity to collect on some outstanding accounts. Read on to determine what to do next. 

Should your business write off bad debt at the end of the year?

Clean Up Accounts Receivable

Cleaning up accounts receivable entails various activities to prepare for the new year with a fresh start. Some accounting departments will choose to perform an end of year audit to review and reconcile records, accounts and other balances. A checklist might include:

  • Entering expenses or checks that have not been entered in the books already
  • Check payable records against vendor records so there are no unexpected bills due
  • Send invoices early enough so that receivables are paid before the end of year
  • Check transactions, inventory and financial statements for inaccuracies

Although the end of year, or the end of the fiscal period, is a good time to perform these tasks, it can be done any time to ensure proper record keeping, collect more cash and reduce the load around the holidays.


Identify Delinquent A/R

Another important year-end task includes identifying delinquent accounts receivable. These accounts may be unpaid because an invoice was sent too late or to the wrong contact. It could be that the client is refusing to pay, unable to pay or a host of other reasons.  After reconciling bank statements and checks, the fastest way to identify these accounts is by running an aging report. This report can reveal which accounts may be collectible and which ones should be written off at the end of the year.

See also: End of Year Accounts Receivable Best Practices

Don't Write Off These Accounts... Yet

Just because an account is past due, it doesn't mean that it should be written off as bad debt. There may still be an opportunity for collections once the debt is identified. Options for your business instead of writing off the debt include:

  • Send reminder notices that the account is past due
  • Work with a collections agency to recover the total amount
  • Settle or accept less than the total amount due
    Send These Reminder Notices
Write Off These Receivables at Year End

If your business has clients with severely delinquent invoices, these aging receivables can be written off in the current year and sent to collections. The IRS suggests writing off receivables at the end of the year if:

  • There is proof of the obligation to pay you via a contract or signed agreement.
  • The debt is part of your gross income (true if you're using the accrual method of accounting).
  • The debt is related to your client offering of goods or services.
  • The debt is worthless or you are unable to collect the entirety of what's owed to you.

Your clients may be closing out their year-end books as well so this may be the perfect time to collect past due invoices. Even if you've written off an account as bad debt, a professional business collections agency can still help collect most, if not all, of the total amount. 

Let us know if we can help!
Here's how Enterprise Recovery collects on bad debts.


Topics: Best Practices, Accounts Receivable