Example
A $1,400 invoice from a client whose company was dissolved is bad debt, not an overdue invoice.
Also called an uncollectable account or a doubtful debt.
What it means in practice
Bad debt is what is left when chasing, a payment plan and a claim have all failed, or when the client has gone under. Recognizing it is a decision, not a failure: it stops you spending more time on money that is not coming.
Write it off in your records rather than deleting the invoice, so the sale and the loss both stay in the history. If you use cash accounting you never recorded the income, so there is nothing to write off, only time you will not get back.
Covered in full in the guide to chasing an unpaid invoice.
Where it shows up on the paperwork
Bad debt does not appear on anything you send. The invoice stays as it was issued; what changes is your own record, where it moves out of what you expect to collect.
What goes wrong
- Deleting the invoice. The sale happened, the loss happened, and both belong in the history.
- Calling it bad debt at 45 days. An invoice is bad when the routes to collecting it have been tried, not when it is annoying.
- Taking more work from the same client while the old invoice sits there.
Common questions
When should I write off a bad debt?
When the client cannot pay or cannot be made to: a dissolved company, a failed claim, or an amount too small to be worth pursuing. Setting a point, such as 120 days or a failed claim, stops the decision drifting.
Can I claim tax relief on a bad debt?
It depends on how you account. On accrual accounting you recorded the income, so the write-off is usually deductible. On cash accounting you never recorded it, so there is nothing to deduct. Your accountant will confirm which applies.