Before you think about writing off bad debt, you need to know your accounting method. This is the single biggest factor and it trips up a lot of small business owners.

If you’re on cash basis accounting, which most small businesses are, you only record income when you actually receive payment. That means an unpaid invoice was never recorded as revenue in the first place. There’s no income to reverse and no bad debt to write off. You simply never got paid, and your books already reflect that. The impact is more about lost time and effort than an accounting adjustment.

If you’re on accrual basis, the situation is different. You recorded the revenue when you invoiced the customer, so your books show income you never actually collected. That’s where bad debt comes in. You need to remove that receivable from your books and recognize the loss.

For accrual basis businesses, the general guideline is to write off an invoice after you’ve made reasonable collection efforts and it’s clear the customer isn’t going to pay. Most businesses use 90 to 120 days past due as the threshold, but there’s no single rule that applies to everyone. A $500 invoice from a customer who went out of business is probably worth writing off at 90 days. A $15,000 invoice from a customer who is disputing the work might need a different approach, possibly involving legal action before you give up on collecting.

Document your collection efforts. Save copies of follow-up emails, notes from phone calls, and any written demand letters. The IRS requires you to show the debt is genuinely worthless before you can claim a bad debt deduction on your taxes. “They stopped returning my calls” is a start, but having a paper trail of multiple attempts over several months is much stronger support.

When you’re ready to write it off, record the amount as a bad debt expense in your books and remove it from accounts receivable. In QuickBooks, you can do this through a credit memo or journal entry. Make sure the original invoice gets closed out so it’s not sitting in your aging report forever, making your receivables look healthier than they are.

Staying on top of your invoicing and payment tracking is the best way to prevent bad debt from piling up. The sooner you know someone is falling behind, the sooner you can follow up. An invoice that’s 15 days late is much easier to collect than one that’s 120 days late. Aging reports should be reviewed weekly or at least monthly so nothing slips through the cracks.

One more thing to consider is whether to use the direct write-off method or the allowance method. The direct write-off method records bad debt only when a specific invoice is deemed uncollectible. The allowance method sets aside a percentage of receivables each period based on historical collection rates. For most small businesses, the direct write-off method is simpler and perfectly acceptable. Larger businesses with high invoice volume sometimes benefit from the allowance method because it smooths out the impact on their financials.

If you’re unsure how your books handle receivables or whether your accounting method even requires a bad debt entry, a bookkeeper in Chandler can review your setup and make sure unpaid invoices are handled correctly. Getting this wrong can mean overstating your income, which affects everything from your tax bill to how you evaluate your business performance.