Definition of Accounts Written Off

Accounts written off refer to receivables that a business deems uncollectible and removes from its financial records. These accounts typically arise when customers fail to pay outstanding invoices despite collection efforts.

In Canada, businesses follow International Financial Reporting Standards (IFRS) or Accounting Standards for Private Enterprises (ASPE) when handling bad debts. The Canada Revenue Agency (CRA) allows businesses to claim a tax deduction for written-off accounts if they demonstrate reasonable collection efforts.

For example, if a Toronto-based business is unable to collect $5,000 from a customer after multiple attempts, it may classify the amount as a bad debt expense and write it off.

Purpose of Writing Off Accounts in Business

Writing off accounts helps businesses:

1. Ensure Accurate Financial Reporting – Removes uncollectible debts from financial statements.
2. Reflect True Revenue – Prevents overstating expected income.
3. Comply with CRA Tax Rules – Allows businesses to claim tax deductions.
4. Improve Financial Ratios – Adjusts receivables to reflect only collectible amounts.
5. Optimize Cash Flow Management – Focuses collection efforts on recoverable accounts.

Process of Writing Off Accounts Receivable

1. Identify Uncollectible Accounts

Businesses assess overdue receivables and classify those unlikely to be recovered.

2. Attempt Collection Efforts

Before writing off, companies send multiple payment reminders, charge late fees, and may work with collection agencies.

3. Record the Write-Off Entry

Using the direct write-off method or allowance method, businesses adjust their books to reflect the bad debt.

4. Report for Tax Purposes

Under CRA regulations, businesses may claim the written-off amount as an expense, reducing taxable income.

5. Continue Collection Efforts (If Applicable)

Even after writing off a debt, businesses can still attempt recovery through legal means. If recovered, it is recorded as bad debt recovery income.

Accounting Methods for Writing Off Accounts

1. Direct Write-Off Method

• The bad debt is removed directly from accounts receivable.
• It is simple but does not align with the matching principle in accrual accounting.
• Small businesses often use it with minimal bad debt.

Journal Entry Example:

If a company writes off $2,000 of uncollectible receivables:

 Bad Debt Expense    2,000
     Accounts Receivable    2,000

2. Allowance Method (Preferred for Large Businesses)

• Estimates uncollectible debts before they occur using a percentage of total receivables.
• Complies with IFRS and ASPE standards.
• Provides a more accurate representation of a company’s financial position.

Journal Entry Example:

If a business estimates that 5% of receivables will be uncollectible:

 Bad Debt Expense    5,000
     Allowance for Doubtful Accounts   5,000

When a specific account is written off:

 Allowance for Doubtful Accounts   2,000
     Accounts Receivable   2,000

Accounts Written Off vs. Bad Debt Expense

Category	Accounts Written Off	Bad Debt Expense
Definition	Removal of uncollectible accounts	Estimated expense for potential bad debts
Accounting Method	Recorded when collection fails	Recorded as a reserve for future bad debts
Timing	After collection attempts	At the time of revenue recognition
Financial Impact	Reduces accounts receivable	Adjusts income statement

Advantages and Disadvantages of Writing Off Accounts

Advantages

• Ensures Accurate Revenue Reporting – Removes unrealistic receivables from books.
• Reduces Taxable Income – Can be claimed as an expense under CRA guidelines.
• Prevents Inflated Financial Statements – Ensures asset values are not overstated.
• Frees Up Collection Resources – Allows businesses to focus on recoverable accounts.

Disadvantages

• Affects Profitability – Reduces reported revenue.
• Impacts Credit and Financing Options – High write-off amounts may signal financial instability to lenders.
• Requires Documentation for CRA Deductions – Must prove efforts were made to collect.

Best Practices for Managing Accounts Written Off

1. Implement Strict Credit Policies – Screen customers before extending credit.
2. Monitor Accounts Regularly – Identify overdue invoices early.
3. Use Automated AR Software – Tools like QuickBooks, Xero, or Sage help track receivables.
4. Offer Payment Plans – Provide installment options for struggling customers.
5. Work With Collection Agencies – Recover debts before resorting to write-offs.

Interesting Fact

Did you know? In Canada, businesses must retain records of written-off accounts for at least six years for CRA audits.

Statistic

According to CPA Canada, nearly 20% of small businesses in Canada report bad debts annually due to non-paying clients.

Frequently Asked Questions (FAQ)

1. Can a written-off account still be collected?

Yes, businesses can still pursue legal action or sell debts to a collection agency after writing them off.

2. How does writing off accounts affect financial statements?

It reduces accounts receivable and increases bad debt expense, lowering net income.

3. Can businesses write off accounts for tax deductions in Canada?

Yes, but they must provide proof of collection attempts before claiming the deduction.

4. How often should businesses review accounts for write-offs?

At least annually or quarterly, depending on industry norms and business size.

5. What is the difference between doubtful and written-off accounts?

A doubtful account is an estimate of potential bad debt, while a written-off account is confirmed as uncollectible.