In accounting, bad debts are typically written off in two ways, though the proper way to write off the bad debt depends on how you account for the possible bad debts. You can either use an allowance method or a direct write-off method. However, the Generally Accepted Accounting Principles only allows for the use of the allowance method. The allowance method takes a portion of credit sales and estimates that the company will not collect that amount.
Determine the amount of bad debt you want to write off. For example, assume you determine that you will not collect $500 from a sale.
Debit "Allowance for Doubtful Accounts" and credit "Accounts Receivable." Then, when the cash is determined to be fully noncollectable, debit "Bad Debt Expense" and credit "Allowance for Doubtful Accounts."
Debit "Bad Debt Expense" and credit "Accounts Receivable" to use the direct write off method. In the example, debit "Bad Debt Expense" by $500 and "Accounts Receivable" by $500.
Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.