Start with the aging report
Run an aging report as of December thirty-first. It groups unpaid invoices by how long they have been outstanding. Compare the total to the receivables balance on the balance sheet. If they differ, find out why before doing anything else. Common causes are unapplied payments, credits not matched to invoices and invoices entered in the wrong year.
Contact customers with older balances and ask for a payment date. Write down what each one says and when.
Clean up what is not really a receivable
Apply customer payments that were recorded as deposits, match credit memos to invoices and remove duplicates. Check for invoices to customers who have already paid in another way, such as in cash or through a processor. Cleaning these shows the true outstanding amount.
If you are a cash method taxpayer, unpaid invoices have not been counted as income yet, so your focus is on cash flow rather than on write-offs.
Decide what is uncollectible
A debt is typically considered uncollectible when you have good reason to think it will never be paid, such as bankruptcy, a closed business, or a customer who cannot be found. Keep evidence of your efforts: reminders, letters, calls and the customer's replies. Time alone is not a decision. Document why each invoice is written off.
Check whether the invoice included sales tax. Some states allow a recovery of tax paid on uncollected sales, with specific procedures.
Record the write-off properly
Use a bad debt expense account and reduce the receivable balance with a dated entry, rather than deleting the invoice. If you later collect a written-off amount, record it as a recovery. Some accrual businesses also set up an allowance for doubtful accounts, a decision to review with an accountant.
Keep a list of written-off customers so that you do not extend credit to them again without thought.
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Improve the process for next year
Review what made invoices late. Perhaps terms were unclear, invoices were sent late, or there was no reminder system. Fixes include sending invoices the same day, stating terms plainly, asking for deposits on big jobs and using automatic reminders in your software.
A short weekly look at the aging report prevents the end-of-year surprise.
A short script for collection calls
A calm, factual call tends to work well: state the invoice number, date and amount, ask whether anything is wrong with it, and ask for a payment date. Follow with an email recapping the conversation. If the customer disputes the invoice, record the reason and decide whether a credit is warranted.
These notes later serve as the evidence that you tried to collect, which supports the write-off decision if it comes to that.
Worked example with numbers
A $1,500 invoice is 180 days past due and the client has closed. After reasonable collection attempts, write it off. Use bad debt expense of $1,500 and reduce receivables by $1,500. If the client later pays, reverse it. Deleting the invoice would hide the revenue that you actually recorded.
Mistakes that cost money
Leaving dead invoices on the books. Deleting instead of writing off. No written write-off policy.
Check your work
The aging total should equal receivables on the balance sheet.
Common questions
Should I write off small invoices to clean up my reports?
Only if they are truly uncollectible and you document why. Do not use write-offs just to tidy a report.
Does a write-off cancel the customer's debt?
No. Writing it off in your books is an accounting step, not forgiveness. Whether to keep trying to collect is your decision.
Who should decide the tax treatment?
Your CPA or preparer, based on your accounting method.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.
