Accounting Best Practices, Fifth Edition

7–11. Write Off Small Balances with No Approval

The typical procedure for writing off a bad debt is for a collections person to complete a bad debt approval form, including an explanation of why an account receivable is not collectible, which the controller must then review and sign. The form is filed away, possibly for future review by auditors. This can be a time-consuming process, but a necessary one if the amount of the bad debt is large. However, some bad debts are so small that the cost of completing the associated paperwork exceeds the bad debt. In short, the control point costs more than the savings for small write-offs.

The obvious solution is to eliminate approvals for small amounts that are overdue. One should determine the appropriate amount for the upper limit of items that can be written off; an easy way to make this determination is to calculate the cost of the collections staff’s time, as well as that of incidental costs, such as phone calls. Any account receivable that is equal to or less than this cost should be written off. The timing of the write-off, once again, depends on the particular circumstances of each company. Some may feel that it is best to wait until the end of the year before writing off an invoice, while others promptly clear them out of the accounts receivable aging as soon as they are 90 days old. Whatever the exact criteria may be, it is important for management to stay out of the process once the underlying guidelines have been set. By staying ...