A written off invoice is an invoice that you’re sure won’t get paid. The invoice amount is considered bad debt.
If your client is unable to pay you, and you’ve tried to collect the money, you can write off the invoice as bad debt.
Note that you only do this for invoices that aren’t going to be paid; if you’ve made a mistake on an invoice, you have to credit the invoice and then create a new invoice with the correct details.
When can I write off an invoice
The exact requirements to be able to write off an invoice will vary from country to country, but generally a certain amount of time must have passed since you issued the invoice, and you must have tried to collect the debt.
Trying to collect the debt can include:
- Sending payment reminders
- Trying to reach out to the client in phone or in person
- Trying to reach an agreement with the client, for example a payment plan or discount, if they’re unhappy with the product or service
- Adding late payment fees or interest
- Pursuing debt collection
Once you can demonstrate that you’ve tried to collect the money, but have been unsuccessful, you can write off the invoice. If the client has gone bankrupt, you won’t have to do all of the above, but can simply write off the invoice.
Why it’s important to mark the invoice as written off
You should make sure to write off uncollectible invoices, since they’re a loss for your business that lowers your taxable income. In other words, you won’t have to pay tax on the invoice amount, since you never received it.
Additionally, when you write off these kinds of invoices, you ensure that you have a more accurate overview of the financial health of your business, since your reports won’t include money that you’re never going to receive.