Glossary · Sales and receivables
Bad debt
Bad debt is money a customer owes that you no longer expect to collect, because the customer will not or cannot pay. Writing it off removes the unpaid invoice from accounts receivable and records the loss as an expense, so the books stop showing money that will never arrive.
Glossary / Bad debt · Also called Uncollectible account, Write-off
How it works
Bad debt only arises when income was recorded before it was received, which means accrual-basis books. On cash-basis books the sale was never counted as income, so there is nothing to write off.
Small businesses usually use the direct write-off method: when a specific invoice is clearly uncollectible, they write it off. Larger businesses may keep an allowance for doubtful accounts, an estimate set aside in advance. Either way, keep evidence of your collection efforts.
If the customer later pays after all, the write-off is reversed and the payment recorded as usual.
Worked example: Writing off a closed customer's invoice
A supplier has a $2,260 invoice ($2,000 plus $260 of 13% HST) to a customer that has gone out of business. After several letters and calls, the supplier writes it off.
Accounts receivable falls by $2,260. A Bad Debt expense of $2,000 is recorded. In Canada, the $260 of HST already remitted can be recovered as a bad debt adjustment on the GST/HST return, so it reduces tax owing rather than becoming an expense.
In the US and in Canada
In the United States
The IRS lets a business deduct a business bad debt that is wholly or partly worthless, if the amount was previously included in income. Cash-basis taxpayers generally cannot deduct unpaid invoices they never reported as income.
In Canada
For income tax, a reasonable reserve for doubtful debts or a write-off of a bad debt is deductible if the amount was included in income. For GST/HST, a registrant can claim a bad debt adjustment for the tax portion of a debt written off.
In AcboBooks
In AcboBooks, an invoice or part of one is written off with a credit memo posted to a Bad Debt expense account and applied to the invoice, so the invoice closes and the history stays visible.
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Updated October 25, 2026. General information, not tax, legal or accounting advice. Rules and rates change; check with the IRS, the CRA, your state or province, or your accountant.
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