Writing Off a Debt and What It Does to Your Numbers
A bad debt is a decision a person makes on a date with a written reason, not an invoice that quietly ages forever. What a write-off moves in every figure, why deleting the invoice is the worst option, and how it differs from a part payment and a credit note.
There is an invoice that has been outstanding for long enough that you have stopped calling it overdue and started calling it the situation. Every ageing report still shows it. It is the row you scroll past. And it has been there so long that the number has stopped meaning anything, which is the real problem, because a number that means nothing still sits inside every total you report. Total billed includes it. Total outstanding includes it. The gap between them looks like a collection failure of a size that is partly fiction, and the client profitability figure that contains it is wrong by exactly that much.
A write-off is the decision that ends that state. It is not an invoice status, it is not a payment, and it is not the same thing as writing the row away. It is a dated decision by a named person that the business will not collect this amount, with a reason attached, which leaves the original invoice and the original claim intact and readable forever. Get that shape right and the ageing report becomes true again. Get it wrong, in either direction, and you have either kept a fiction alive for another year or destroyed the evidence of what actually happened.
This is the second of four articles on collections. The others cover the promised date that was not the money, the call nobody wants to make, and the dispute that is a fact about the relationship. This one is the least comfortable of the four and the most mechanical, which is the only reason it is worth writing down.
The mechanismA write-off is a decision, not a state of the invoice
The invoice does not change when you write it off. That is the sentence people resist, and it is the sentence that makes the whole thing work. The invoice remains the claim you made, with the number you made it at, on the date you made it, and it remains readable. What changes is that a new record now exists saying: on this date, this person decided we will not collect this, for this reason. The write-off points at the invoice. It does not become the invoice.
This is the same principle as the credit note and the reversal, and it is the reason those exist as separate documents rather than as edits. An issued invoice is a statement about a taxable event that happened. Correcting the statement does not change the event. Our own description of how settlement records work says it plainly: corrections do not edit the original document, they attach a new one to it, so the original stays on the record. A write-off follows the same shape for the same reason. What you need in six months is not a clean ledger, it is a true history.
So the decision has four parts, and a write-off missing any of them is not finished. Which invoices, in total. When the decision was made. Who made it. Why. The reason is the part that is always skipped and the part that carries all the value, because the reason is the only thing that will tell you anything in eighteen months about what your business keeps writing off. A write-off with no reason is indistinguishable from a bookkeeping mistake, and it will be read as one by whoever examines the accounts, including you.
The 18% GST figure used in the worked examples below appears only to keep the arithmetic checkable so you can verify the totals by hand. It is not a statement about the rate that applies to your business, and nothing in this article is tax advice. How a written-off amount should be treated in your returns, and what your accountant needs to see alongside it, is a question for your own chartered accountant. We do not file GST returns and we do not pursue statutory recovery.
A worked exampleA book of five invoices, and what one decision does to it
Five invoices, constructed for this article. Every one is a real shape: one clean, one partly paid, one large and nearly settled, one small and old, one that has stopped moving. All totals include GST at 18 percent, used only so you can check the arithmetic, and all the arithmetic is shown below.
I-201: taxable 40,000, GST 7,200, total 47,200. Fully paid.
I-202: taxable 20,000, GST 3,600, total 23,600. Fully outstanding, recent.
I-203: taxable 100,000, GST 18,000, total 118,000. Part paid: 70,800 received, so 118,000 minus 70,800 is 47,200 outstanding.
I-204: taxable 8,000, GST 1,440, total 9,440. Fully outstanding, oldest.
I-205: taxable 30,000, GST 5,400, total 35,400. Fully outstanding, and the customer has stopped replying.
Check the GST first, line by line, because everything downstream depends on it. 40,000 times 0.18 is 7,200. 20,000 times 0.18 is 3,600. 100,000 times 0.18 is 18,000. 8,000 times 0.18 is 1,440. 30,000 times 0.18 is 5,400. Taxable values added: 40,000 plus 20,000 is 60,000, plus 100,000 is 160,000, plus 8,000 is 168,000, plus 30,000 is 198,000. GST added: 198,000 times 0.18 is 35,640. And 198,000 plus 35,640 is 233,640, which is the total billed for the book. The line totals agree: 47,200 plus 23,600 is 70,800, plus 118,000 is 188,800, plus 9,440 is 198,240, plus 35,400 is 233,640.
Collected: I-201 in full is 47,200, plus 70,800 against I-203, which is 118,000. So collected is 118,000. Outstanding is the rest: 23,600 on I-202, 47,200 on I-203, 9,440 on I-204, and 35,400 on I-205. Added: 23,600 plus 47,200 is 70,800, plus 9,440 is 80,240, plus 35,400 is 115,640. And the shortcut agrees: 233,640 billed minus 118,000 collected is 115,640. Both routes give the same number, which is what a clean book should do.
The same book, in one table. All figures constructed for this article; the GST rate is used only to keep the totals checkable.
| Invoice | Taxable | GST at 18% | Total | Collected | Outstanding |
|---|---|---|---|---|---|
| I-201 | 40,000 | 7,200 | 47,200 | 47,200 | 0 |
| I-202 | 20,000 | 3,600 | 23,600 | 0 | 23,600 |
| I-203 | 100,000 | 18,000 | 118,000 | 70,800 | 47,200 |
| I-204 | 8,000 | 1,440 | 9,440 | 0 | 9,440 |
| I-205 | 30,000 | 5,400 | 35,400 | 0 | 35,400 |
| Total | 198,000 | 35,640 | 233,640 | 118,000 | 115,640 |
Check it two ways. Taxable total 198,000 times 0.18 is 35,640, and 198,000 plus 35,640 is 233,640. Collected 118,000 subtracted from billed 233,640 is 115,640, which is the sum of the outstanding column: 23,600 plus 47,200 plus 9,440 plus 35,400.
The consequenceWhat one write-off does to every figure that included it
Write off I-205, 35,400. Four things move, and one thing does not, and the thing that does not move is the one people find surprising.
Outstanding falls: 115,640 minus 35,400 is 80,240. You can check it against the remaining rows: 23,600 on I-202, 47,200 on I-203, 9,440 on I-204, which is 70,800, plus... no. Sum those three properly: 23,600 plus 47,200 is 70,800, plus 9,440 is 80,240. Agrees.
Billed for the period falls by the same 35,400: 233,640 minus 35,400 is 198,240. This is the part people argue about. If the write-off reduces what the period counts as billed, then the gap between billed and collected narrows by 35,400 without a rupee being collected, and the period looks better than it was. Which is correct depends on what your billed figure is supposed to mean, and the answer is that it should mean what you raised, with the written-off amount visible as a separate line rather than quietly netted away. If billed simply drops, the comparison against last quarter is broken and nobody will ever be able to say why.
Collected does not change: 118,000 before, 118,000 after. Cash in the bank does not change either, and this is the part that surprises people, so say it plainly. A write-off is not a receipt and not a reversal. It is a decision that the money will not arrive, which touches no bank account and produces no cash movement whatsoever. If your write-off appears to improve your cash position, something else is happening and it is worth finding out what.
The ratio moves, and we are deliberately not printing it. The obvious figure here is collected divided by billed: 118,000 against 233,640 before, 118,000 against 198,240 after. Both of those divide cleanly and both would be a percentage, and we are not going to print one, because a printed percentage is a number readers compare against a benchmark we have never measured, and the honest answer to the benchmark question is that we do not have one. Divide it yourself if you need to. What we will say is which direction it moved and why, and the direction is that it improved while the business got 35,400 worse off in real terms, because the amount is not claimed any more while the cost of delivering that work was already incurred and did not go anywhere.
The uncomfortable arithmeticA write-off removes revenue and does not remove cost
This is why a small write-off can be a bad quarter. Take a project, constructed: quoted 236,000, billed 236,000, direct cost 141,600. Before any write-off, gross profit is 236,000 minus 141,600, which is 94,400. Now write off the 47,200 still outstanding on the large invoice. Revenue the project can ever recognise falls to 236,000 minus 47,200, which is 188,800. Direct cost does not move, because the work was done and the cost was incurred: 141,600. Gross profit becomes 188,800 minus 141,600, which is 47,200.
The revenue fell by 47,200 and the gross profit fell by 47,200 too, from 94,400 to 47,200, because there was no cost to come off. Check the arithmetic both ways: 94,400 minus 47,200 is 47,200, and 188,800 minus 141,600 is 47,200. The project has lost half its gross profit and none of its cost.
Which is the actual argument for deciding early. The longer a write-off sits unresolved, the longer it is inside every margin figure you show anybody, and the longer you are making commercial decisions on a project number that is too high. A project quoted at 236,000 with 47,200 written off does not have a profit of 94,400. It has a profit of 47,200, and if you are pricing the next piece of work off the first number you are underpricing yourself by exactly the difference. This is the failure our own profitability article is about: a margin figure that stops being trustworthy because one component of it was never resolved.
The distinction that mattersWrite-off, part payment, credit note: three different events
These three get confused constantly, and the confusion is expensive because each one implies a different conversation with the customer and a different entry in your accountant's hands. A part payment means money arrived and the claim is smaller. A credit note means you were wrong, or you gave something, and the claim is smaller. A write-off means you are right and the money is not coming, and nobody is at fault. On the customer's side these look similar. In your records they are not similar at all, and one of them is a conversation you can have and two of them are facts you can simply state.
Illustrative: three events that reduce an outstanding balance without being the same event. All figures constructed for this article.
| Part payment | Credit note | Write-off | |
|---|---|---|---|
| What it asserts | The customer paid part of what you claimed | You reduced the claim because the amount or the service was wrong | You are not going to collect this. The claim was valid |
| Effect on outstanding | Falls by the amount allocated: 118,000 billed less 70,800 collected is 47,200 | Falls by the credited amount: on I-204, 9,440 credited leaves 0 outstanding | Falls by the written-off amount: I-205's 35,400 leaves the outstanding total |
| Effect on cash | Cash rises by the amount received, on the date received | No cash movement at all | No cash movement at all |
| What the original invoice looks like afterwards | Unchanged. It is still a claim of 118,000, now settled by allocations | Unchanged as a document. A separate document sits against it and reduces what is claimable | Unchanged as a document. A separate decision record says we will not collect it, with a reason and a date |
| Effect on the project's gross profit | Improves nothing on its own; cash and revenue both improve when the invoice is recognised | Reduces revenue by the credited amount, with no cost removed, exactly as a write-off does | Reduces revenue by the written-off amount, with no cost removed, exactly as a credit note does |
| Can the customer still be invoiced for the balance | Yes, for the unallocated remainder | Yes, for whatever remains after the credit | No. The claim is closed by decision. It does not reappear |
The row worth pausing on is the last one. A part payment and a credit note both leave a live invoice. A write-off ends it. That is why a write-off should never be a casual action taken in the middle of a busy month to make a report look better, and why the decision belongs to a named person with a written reason rather than to whoever is closing the month. A write-off is not a bookkeeping tidy-up. It is the point at which the business stops believing it will see that money, and every consequential decision about the client, the pricing, and whether you work with them again follows from it.
The failure modeWhy deleting the invoice is the worst available option
It is tempting because it produces the cleanest report. Delete the row, the ageing total drops by 35,400, the client stops appearing in the overdue list, and the number nobody could explain becomes a number that simply was never there. Every visible symptom improves. That is precisely what makes it the worst option, and it is worth being precise about the mechanism.
A deleted invoice takes the evidence with it. The tax you charged and the customer you charged it to, the date you raised it, the line items and their values, the payments that were partly allocated against it, and the entire sequence of conversations that ended with silence. What is left is a hole. If your invoice numbers are sequential, the hole is visible, which is not the problem, it is the only mercy. If they are not, the hole is invisible, and the record now contains a period in which you apparently did not bill that customer for work you did, which is an assertion nobody can check.
The comparison figures are the second casualty. Delete I-205 and billed for the period is 198,240 instead of 233,640, and outstanding is 80,240. Those are the same two numbers the honest write-off produces, and that is the trap: the figures cannot distinguish the two, so the decision becomes invisible in the one place you would look for it. Six months later, comparing this month against last month, the difference is 35,400 and there is no record of why. You have not cleaned the books. You have broken the ability to explain them.
The third casualty is your own position. We do not file GST returns and we do not pursue statutory recovery, so nothing in this system will chase anything on your behalf or tell a tax authority anything. But a document you raised and then cannot produce is a document you cannot discuss, and how a written-off amount should be treated in your returns is a question for your own chartered accountant — a question they cannot answer well if the underlying invoice has been deleted. Keep the invoice. Write off the claim. The invoice is what makes the conversation with your accountant short.
The methodWhat the write-off record has to hold
A write-off is finished when all of these are true
- The invoices it covers are named individually, not described as a category, so the amount can be checked against the invoices
- The total, which reconciles to the sum of those invoices' outstanding amounts at the moment of the decision and not at some later date
- The date of the decision and the person who made it, so the decision has an author the way every other record does
- A written reason, in words, specific enough to be useful in eighteen months rather than merely non-empty
- A decision that the claim is closed, so it stops being chased and does not quietly reappear in a later collection run
- The original invoice left readable and unedited, because that document is what your accountant will need to see
One more thing this system does not do, because it would be a serious overreach: it does not pursue statutory recovery. There is no machinery here that files a claim, engages a recovery agent, or contacts a statutory authority on your behalf, and there is no automated escalation that would do it behind your back. Where a debt may be recoverable through a legal or statutory route, that is a decision you take with your chartered accountant and, if it becomes one, with a lawyer. The system's job ends at the boundary: the record tells you exactly what is outstanding, to whom, since when, and what has already been promised. What you do about it is a legal and commercial decision, and it is not ours to make or to automate.
And the reason matters to the decision, not just to the record. A customer who has gone quiet after a price dispute and a customer who has gone quiet after their business closed are both an outstanding invoice, and only one of them is a relationship problem. The reason field is the only place that distinction can live, and if you skip it you have thrown away the only input you will get for deciding whether to write off, to chase, or to write the amount into next quarter's expectation.
Frequently asked questions
What is the difference between a write-off and a credit note?
A credit note reduces what you can claim because the amount or the service was wrong, and it leaves the customer owing whatever is left. A write-off closes the claim because the money is not coming, and it leaves the customer owing nothing. Both leave the original invoice unedited, and both reduce your revenue without removing any cost, so both hurt a project margin by the full amount. The difference is the conversation: a credit note is something you tell the customer, a write-off is something you decide.
Is a part payment a kind of write-off?
No, and the distinction is the difference between a live invoice and a closed one. A part payment creates a payment record and an allocation, outstanding falls by the allocated amount, and the remainder stays collectable. A write-off creates no payment and no allocation, so it does not move cash at all. If you find yourself treating a part payment as a write-off, you have probably stopped allocating, which turns the invoice's derived state into something you are maintaining by hand.
Should I delete the invoice once I have written it off?
No, and this is the strongest recommendation in the article. Deleting produces exactly the same two totals as an honest write-off while destroying the evidence, which means the change is invisible in the one place you would look for it. You lose the document, the line items, the partly allocated payments, and the reason. Six months later the comparison against last month differs by the written-off amount and there is no record of why.
Who should be allowed to make the write-off decision?
One named person, and the record should say who it was. Not because the amount is usually large, but because a write-off is a belief about the future rather than a fact about the past, and beliefs are worth attributing. If several people can write off receivables independently, the total of what your business has stopped expecting becomes something nobody owns and nobody reviews.
How should a written-off amount be treated in my GST returns?
That is a question for your own chartered accountant, and this page will not answer it. We do not file GST returns and we do not pursue statutory recovery, and nothing here should be read as tax advice. What we can say is procedural: keep the original invoice, keep the write-off decision with its date, person, and reason, and give your accountant both. The quality of that conversation depends entirely on the records surviving, which is the argument for never deleting.