Bad debt write-off
The moment a receivable becomes a loss.
By Solomon Ajayi · Free to read, no signup
A B2B partner owes you ₦5,000 from a service you delivered last quarter. They have not paid. They will not pay. After 90 days of follow-ups, you write it off: remove the receivable from your books, recognize the loss as a Bad Debt Expense. The original sale stays, the loss is separate. This is the moment money becomes 'we will never see this.'
Under accrual accounting you recognize revenue when you deliver the service, not when the cash arrives, so a delivered-but-unpaid invoice sits on your books as a receivable: an asset, a thing of value, money someone owes you. That works as long as the someone eventually pays. When they go silent for good, the asset is a lie. You are carrying value that will never become cash.
Writing it off corrects the lie in two moves. You credit the Partner Receivable down to zero, because it is no longer an asset, and you debit a Bad Debt Expense, because the value you booked has turned into a loss. The Service Revenue from the original sale stays exactly where it is. The sale really happened and you really earned it; the failure to collect is a separate, later event, and it belongs in its own account.
Keeping revenue and bad debt in separate accounts is what gives investors two honest signals: how much business you wrote, and how much of it you failed to collect. Net them together and you hide your collection problem inside a smaller revenue number. That is why auditors care so much about the timing here; a receivable nobody intends to collect, left on the books, inflates both your assets and your apparent solvency.
Worked example, step by step
Original sale (last quarter)
You delivered services to a partner. They were billed ₦5,000. You recognized the revenue (you EARNED it) and recorded a receivable (they OWE it).
| Account | Debit | Credit |
|---|---|---|
| Partner Receivable (1700) | ₦5,000.00 | |
| Service Revenue (4000) | ₦5,000.00 |
Partner Receivable UP ₦5,000 (asset, they owe us). Service Revenue UP ₦5,000 (income, we earned it). Notice: cash did NOT move, revenue is recognized when earned, not when paid. This is accrual accounting in action.
90 days later: write off as bad debt
Partner has gone silent. Phone calls, emails, demand letters, nothing. Your collection policy says 90 days, after which you write it off. The receivable is removed from your books and recognized as a loss.
| Account | Debit | Credit |
|---|---|---|
| Bad Debt Expense (5400) | ₦5,000.00 | |
| Partner Receivable (1700) | ₦5,000.00 |
Bad Debt Expense UP ₦5,000 (the loss). Partner Receivable DOWN ₦5,000 (no longer an asset). Critically: Service Revenue is UNTOUCHED. The sale happened, the revenue was real. The loss is a SEPARATE event. Reversing the original revenue is the temptation; resist it. Auditors and investors need to see gross revenue AND gross bad debt, both numbers tell a different story.
Takeaway
Bad debt is an asset that became a loss. Remove the receivable, recognize the expense, leave the original revenue alone. Investors need to see your gross revenue AND your bad-debt rate as two separate signals. Failing to write off uncollectible receivables inflates your assets and your reported solvency, a classic accounting fraud pattern and one that auditors look for.
Practice this on a real ledger
Reading is half of it. Open this lesson in the lab to post the entries yourself against a real Postgres-backed double-entry ledger, with the validation on. Free, your sandbox is yours.