How to Account for Bad Debt Using the Specific Write-Off Method

A call from a bill collector isn't fun for anyone. The company making the call is faced with as serious a challenge as the consumer. The organization must determine when to stop pursuing accounts receivable. It must also look at the behavior of similar payers and decide if a write-off is necessary. The specific write-off method is one technique that is appropriate for many organizations.

Difficulty: Moderate

Instructions

1. Analyze the collectability of claims to determine if a specific write-off is appropriate. If a large portion of accounts receivable consistently do not pay, do not use the specific write-off method. This method should only be used when uncollected claims are few and far between.

2. Decide which claims are uncollected. Write these claims off by deducting them from the overall accounts receivable. For most automated systems, this is a matter of following the write-off process for the specific software. Create a new accounts receivable report after the write-off with the update numbers.

3. Be prepared to explain why a particular claim was written off. This includes a record of attempts made to collect funds by mail or phone. It should also fall in line with a written policy and procedure regarding write-offs.

4. Continue to assess the accounts receivable for the organization. If large portions of the A/R start to become uncollected, it will be necessary to abandon the specific write-off method and review other methods for writing off dollars that can't be collected.

[cschenk]

on 5/2/2009 These steps don't consider the criteria for writing off a bad debt. 1) Proof of a relationship to the debtor through a variety of resources including invoices, contracts, or other business documents, 2) proof that the debt is completely devoid of value and has a minuscule chance of becoming collectible, and 3)prove a real loss. Either a cost with a tangible product sold or the debt has already been included as income (through accrual accounting method). Note the IRS frowns on writing off the cost of your time and effort. Do others have thoughts on writing off ones time/labor?