What is the difference between bad debt and write off?

The term ‘bad debt’ and ‘write off’ are often used together in a sentence but they have different meanings. First, we will discuss them in brief to understand the differences between them.

Bad debts

We know, debtors for a business are their assets because the business has the right to receive money from the debtors due to the goods supplied to them.

But if due to circumstances, there appears no probability that the amount due to one or more debtors will be realised to the business, then such debts are categorised as bad debts.

In short, bad debts refer to the amount of money that will not be received from some debtors of the business due to some circumstances like insolvency of debtor etc.

Bad debt is deducted from debtors account by the following journal entry:

As bad debts are losses to a business, it is ultimately written off from the profit and loss account.

Write off

In layman terms, write off means to deduct something out from something. In accounting, write off means to deduct or reduce value of assets by crediting it to a liability account which is usually a reserve account or the profit and loss account.

It also refers to the elimination of an item from the books of accounts particularly losses and expenses.

Generally, writing off is associated with the following:

1. Bad debts.
2. Damaged Inventories.
3. Loss on issue or redemption of debentures.
4. Preliminary expenses.
5. Bad loans and advances.

Write off can be done in one of the following methods:

1. Direct write-off: The write off is directly done by crediting asset account or loss account and debiting the reserve or P/L account.
2. Indirect write-off: Here, an intermediate account is involved between the asset account and liabilities account. A common example is writing off of bad debts where the bad debts account is the intermediate account.

Hence, the following differences can be observed between bad debts and write off or writing off: