The bad debt writeoff and the allowance for doubtful accounts are two distinct accounting concepts related to the treatment of doubtful or uncollectible receivables, but they are used at different stages of the receivable management process.
1. Bad debt writeoff
The write-off of bad debts involves permanently removing a receivable from the accounts because it is deemed uncollectible. This means the company has decided that the debt will never be paid, either because the debtor is insolvent or for other reasons that make recovery impossible.
Accounting impact: When the debt is written off, it is removed from the balance sheet (from the assets side) and recorded as a loss in the income statement.
Timing: The write-off occurs after all recovery efforts have failed, and there is certainty that the money will never be recovered.
2. Allowance for doubtful accounts
The provision for bad debts is an accounting mechanism that allows a company to anticipate a potential loss related to a doubtful receivable. If a receivable appears difficult to collect but there is no certainty yet that it is uncollectible, the company may set up a provision.
Accounting impact: The provision is recorded as an expense in the income statement, but the receivable remains on the balance sheet. The provision does not remove the receivable; it simply anticipates a possible loss as a precaution.
Timing: The provision is established when there is serious doubt about the recovery of a receivable, but before the debt is judged uncollectible. If the receivable is eventually collected, the provision is reversed; if it becomes uncollectible, it will then be written off.
Summary of differences
A provision is an anticipatory estimate of a possible loss and does not remove the receivable from the balance sheet. It can be reversed if the debt is recovered.
A write-off, on the other hand, is the permanent removal of the receivable when its recovery is considered impossible.
The provision is thus a preventive step, while the write-off is a final decision after recovery has failed.