Bad Debts — When to Write Off and How to Record It

When a Debt Is Actually Bad

There is no fixed number of days. What matters is whether recovery is realistically achievable, and the honest answer is usually visible well before owners are willing to say it. Signals:

• The customer has shut down, disappeared, or is untraceable.
• They are in insolvency or liquidation, and you are an unsecured creditor.
• Repeated contact over months has produced no payment and no engagement.
• Legal action would cost more than the debt, or has already failed.
• The debt is beyond limitation, so it can no longer be enforced.
• The amount is small and has been dead for years — it is costing you attention every month it stays.

Provision vs Write-Off

Many businesses use both: a provision each year based on the ageing profile, and specific write-offs as individual debts die.

The Entries

1. Creating a provision

The balance sheet provision is shown as a deduction from sundry debtors, so the net figure reflects what you realistically expect to collect. A common basis is a rising percentage by ageing bucket — nothing on 0–30, a small percentage on 31–60, more on 61–90, and a large share of anything past 90.

2. Writing off a specific debt

Narration: Written off as irrecoverable — business closed, untraceable since __; approved by __ on __. The narration matters: it is your evidence of the basis and the approval.

3. Writing off where a provision already exists

Charging against the provision avoids hitting the P&L twice for the same loss.

The Income Tax Position

Under Section 36(1)(vii), a bad debt is deductible where:

• It has been actually written off as irrecoverable in the books of the relevant year — a provision alone is generally not enough for most businesses; and
• The debt was taken into account in computing income of that year or an earlier year — that is, the sale was already offered to tax.

Two practical consequences:

1. Advances paid to suppliers that go bad are not "bad debts" in this sense, because they were never income. They may be deductible on another footing; ask your CA.
2. Write off before the year end if you intend to claim it for that year. A decision taken in June about a March year end does not retrospectively create a write-off.

GST on Unpaid Invoices

This is the part that surprises people: you have already paid GST on the invoice, at the time of supply, out of your own pocket. Indian GST does not provide a general mechanism to reclaim output tax merely because the customer never paid.

A credit note can reduce your liability only within the time limits and conditions GST law prescribes, and those are tied to the supply being reduced, returned or cancelled — not to it simply going unpaid. Do not assume a bad debt gives you a GST adjustment; check the specific position with your CA before making any entry.

The practical implication is worth stating plainly: on an unpaid invoice you lose the goods, the margin and the tax you already remitted. That is the real cost of a bad debt, and it is a good argument for the credit checks in Part 3.

If the Money Comes Back

It happens — a liquidation distribution, a settlement, or a customer who reappears years later wanting to trade again.

Recovery of a debt previously written off and allowed as a deduction is taxable in the year of recovery. Keep it in its own income ledger rather than crediting Bad Debts, so both the original loss and the recovery stay visible in your history.

Five Things to Try Before Writing Off

1. Offer a settlement. 60% today is usually better than 100% never, and many customers who cannot pay in full will pay something to close the matter.
2. Offer a payment plan in writing, with dates. A defaulted plan also strengthens your position later.
3. Escalate to the owner personally. A great deal of small-business debt is stuck at the accounts level and has never reached the person who decides.
4. Send a lawyer's notice. Often the cheapest step that produces movement, and inexpensive relative to the debt.
5. Check for offsets. Do you owe them anything? Is there stock, material or equipment of theirs with you? Set-off is faster than recovery.

A Quarterly Write-Off Process

Make it a scheduled decision rather than an annual scramble, and it stops being emotional.

1. Every quarter, list everything past 180 days from the ageing report.
2. For each, record one of four outcomes: chase, settle, legal, or write off.
3. Note the reason and the evidence against each decision.
4. Get the owner's sign-off on write-offs, whatever the size — this is a control, not a formality.
5. Pass the entries and keep the supporting file together.
6. Before year end, complete the round so the deduction falls in the right year.

What's Next?

• Part 1 — Cut Your Payment Cycle: back to the start of the series
• Part 3 — Credit Policy: the decision that prevents the next one
• Allowable Business Deductions
• Financial Statements