Bad Debt Expense: Provision, Write-Off and Recovery

Bad debt expense recognizes a credit-loss provision under the selected accounting policy. A later write-off and recovery are different events. Under an allowance approach, do not record the same expected loss again as expense when the customer balance is removed.

All amounts and operating results below are original fictional teaching examples in USD. They are not customer results, industry averages or forecasts. Use your own dated records and applicable accounting policies.

Identify whether you are estimating, writing off or collecting

This original example uses a US GAAP-style allowance approach for trade receivables, solely to explain posting mechanics. It does not build the full expected-credit-loss estimate. Opening gross AR is $25,000 and allowance is $1,500 credit. Assume a separately supported review requires a $900 current provision before the later events below; there are no other sales, ordinary collections, credits or tax effects.

The allowance guide owns estimation, including current FASB policy choices. A percentage of sales or a textbook aging table should not automatically be described as complete current US GAAP compliance. Keep the entity’s applicable method and approval evidence visible.

Record each event with its own balanced entry

The provision reduces current profit by $900 under this case’s expense convention. The write-off uses the existing allowance. Reinstatement restores the customer item before the supported receipt is allocated. Do not treat the recovered $300 as another sale or automatically reverse $300 of expense without examining the actual policy and allowance estimate.

A write-off decision requires documented authorization and the relevant accounting assessment. It is not created merely by reaching an arbitrary number of days overdue. Collection rights, customer communications and tax treatment can involve separate considerations.

Follow gross AR, allowance and net AR through the sequence

The $1,200 write-off reduces gross AR from $25,000 to $23,800 and allowance from $2,400 to $1,200, leaving net AR unchanged at $22,600. Reinstating $300 increases both balances and still leaves net AR at $22,600. Collecting $300 then changes the composition of assets: net AR becomes $22,300 and cash increases $300.

Across the full sequence, opening net AR $23,500 − $900 provision − $300 recovered cash collection = $22,300. The write-off is not a $1,200 cash payment, and the recovery is not $300 new revenue. Reassess the closing allowance under the actual reporting policy after all relevant evidence is considered.

Do not confuse an allowance provision with direct write-off treatment

A direct write-off presentation records an expense when a specific receivable is removed, rather than first using an allowance. That timing differs from the modeled sequence. It is not presented here as an unrestricted alternative for financial reporting or as automatic tax treatment. Method suitability, materiality, framework and current requirements need their own review.

Financial-reporting expense, customer-ledger removal and tax deduction can occur under different conditions. Recording an allowance or approving a customer write-off does not itself prove a tax deduction is available. This guide intentionally makes no deduction amount, eligibility or filing claim.

Reconcile and preserve the recovery trail

Retain customer ID, original invoice, provision policy, write-off approval, reinstatement reference, bank evidence and cash allocation. Check the customer subledger against gross AR and the allowance rollforward against its control account at the same cutoff. If a receipt cannot be identified, investigate rather than attaching it to a convenient written-off balance.

Use the collection workflow for payment matching, the general ledger record for posting references and the accounting cycle for the reviewed close. A clear audit trail keeps estimation uncertainty separate from an observed bank receipt.

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Sources and scope

Primary references below support the stated definitions or framework. The worked case, numbers and decision records are original MyBreakeven material. Reviewed November 7, 2026; no external professional sign-off is claimed.

• OpenStax: allowance write-off and recovery mechanics
• Cornell: institutional illustration of expense versus allowance write-off; local policy is not universal