Written-off debt amount: 3 figures from a £720 example

Key takeaways

• Keep the invoice total, the amount owed to the debtor and the final debt figure separate.
• Match part-payments to the relevant supplies before calculating the unpaid amount.
• Check the date of supply before choosing an attribution method for older goods.
• Keep the invoice, payment history, calculation and write-off decision together.

This post explains what each number means, how payments and dates change the working, and what to keep on file. The source is VAT Notice 700/18. The post is written for general reading, so read the notice itself before you file anything.

Unpaid invoices are a routine problem for small firms. At some point most owners and bookkeepers have to decide whether to stop chasing a customer and write the balance off. The commercial decision is only half of it. If VAT was charged on the sale, the paperwork carries its own figures, and those figures are easy to mix up.

How do you decide whether to write off an unpaid invoice?

Start with the decision, then the figures. The decision is commercial. Has the customer stopped paying? Have you tried to recover the money? Is there evidence that the balance will not come in? Write down the answers before you touch the accounts. A decision made from memory is hard to defend. A decision made in writing gives you something to point to if the debt is later paid or disputed.

Next, gather the evidence in one place. Pull the invoice, the payment history, and the record of your collection attempts. If the customer has disputed the invoice, record the dispute and what came of it. A disputed debt is a different case from one that is simply overdue, and your write-off record should say which situation applies.

Once the decision is made, work the figures using the approach in the next section. Check each figure against the source documents rather than against the number your software shows. Where the method depends on the date of supply, record which method you used and why. Where part-payments were received, show how you allocated them.

Finally, make the entry, record who approved it and when, and set a reminder to look at the account again. A write-off is not necessarily the end of the file. The paperwork should show what happens next, whether that is a late payment, a settlement, or no further contact at all.

What are the three figures in the £720 example?

The example keeps three figures apart: the £720 invoice total, the £115 amount that the example treats as owed to the debtor when the debt is written off, and the debt amount itself. The example states the last one directly: "Amount of the debt is £720 - £115 = £605.00."

Each figure answers a different question. The £720 is what the customer was invoiced. The £115 is tied to the moment of write-off. The £605.00 is what remains once that amount is taken away. In this example, treating £720 as the debt would overstate it. Those who go straight to £605.00 without recording the £115 leave no trail showing where the difference went.

When you set up your working, give each figure its own line with a short note saying what it represents. Three labelled numbers are much easier to check later than one number that has been quietly adjusted. If you can show all three side by side, anyone who looks at the file can see how the invoice links to the final debt figure. A useful habit is to write the three figures in the same order every time, starting with the invoice and ending with the debt. A consistent order makes a mismatch stand out when you compare files from different months.

Why does the £720 invoice not produce a £720 write-off?

The £115 owed to the debtor reduces the debt amount in this example. The three figures are easier to follow in a single view:

The mechanism matters more than the arithmetic. It explains why a simple "remove the invoice" entry does not match the example. If your accounting software removes the whole invoice from receivables when you mark it as bad, check what entry it has actually made. Check that the entry accounts for any amount owed to the debtor rather than assuming the invoice total is the debt amount. The safest check is to take one invoice from your own accounts, identify any relevant deduction, and compare the calculation with what the software recorded.

Do the same check whenever an invoice has changed after it was issued, such as through a credit note. The total you start from may no longer be the figure the debt was built on, and a write-off that starts from the wrong total will carry the error through every later step.

How do part-payments change the debt amount?

If the customer has paid part of an invoice, decide which payment goes against which supply before you work out what is left to write off.

In practice, list every part-payment with its date and the invoice it was matched to. If a single payment covers several invoices, record how you split it and why. An unallocated part-payment can make the total outstanding look right while the figure for each invoice is wrong, and a write-off built on the wrong split will be hard to defend. For the matching step, see reconcile invoice payments with your bank.

Part-payments often arrive without a reference, which makes allocation harder. Ask the customer for payment details where you can, and note in the file when you had to infer the match from the amount alone. An inferred match is still a match, but it is one you should be able to explain.

Keep the allocation with the write-off file, not in a separate note or in someone's inbox. A reviewer should be able to follow the trail from the original invoice to the payments and then to the final debt figure without asking you anything. If the trail depends on your memory, the file is incomplete.

Illustrative example: a part-payment

An illustrative invoice totals £720, and an illustrative part-payment of £20 is matched to it. Subtracting the payment leaves £700 unpaid. Keep the payment match with the calculation. This shows the unpaid balance only; check the VAT treatment separately before making an entry.

Which attribution method applies to older supplies?

The answer depends on the date of the supply. For goods, the periods run as follows:

These dates apply to goods. If your write-off involves services, do not assume the same three periods apply. Check the rules for the category that matches your invoice before you choose a method, and ask your adviser if the category is unclear.

Old files can be harder to check. A debt opened years ago may have been calculated under a method you no longer use, and the working may sit in a spreadsheet nobody has opened since. Start by sorting open write-offs by date of supply, so you know which invoices fall into each period. Record your choice and calculation so a later reader can follow the working.

What is the difference between a direct write-off and an allowance?

Two approaches sit side by side here, and it helps to know which one your books use. Under a direct write-off, you remove a specific debt from receivables once you decide it will not be paid. The allowance method works differently. The Corporate Finance Institute puts it this way: "In contrast to the direct write-off method, the allowance method is only an estimation of money that won't be collected and is based on the entire accounts receivable account." It adds that "The amount of money written off with the allowance method is estimated through the accounts receivable aging method or the percentage of sales method."

That distinction matters for the £720 example. The example deals with one specific debt that has been written off, so its three figures describe one invoice. An allowance is an estimate spread across the whole receivables account, set up before you know which debts will fail. The two can sit in the same accounts, but they answer different questions, and a bookkeeper who mixes them up will struggle to explain the numbers.

If you are unsure which approach your books use, look at how your last year-end reconciliation treated an old unpaid balance. The answer is usually visible in the accounts, even if nobody wrote it down.

Ask your accountant how the VAT adjustment fits into the approach your business uses. A general description of the allowance tells you how the estimate is built, but it does not say how the VAT side of a specific write-off should be recorded. That part comes from the VAT rules and from your adviser's reading of your position.

What does a write-off look like in the books?

A write-off changes two things at once. The receivables balance goes down as the amount is removed from the accounts, and a matching entry records why. The exact accounts depend on your chart of accounts and on whether you use a direct write-off or an allowance, so treat the wording here as general. What matters is that each entry can be traced back to the invoice and to the figures from your VAT working.

Think of the entry as the end of a short story. The invoice starts it, payments and reminders fill the middle, and the write-off closes it. Each journal line should point to a document that shows why it was made. A line that cannot be linked to a document is one you will have to explain later, and unexplained lines are the ones questioned at year end.

Check the total effect after the entry. Receivables should fall by the amount written off, the matching entry should appear in the period you chose, and the customer's account should show a clear reason rather than a blank. An unexplained balance on a customer account will cause questions at the next reconciliation, even if the overall totals look right.

Other systems tie the adjustment to an earlier return. The Washington State rule on bad debts, published in the Washington State Legislature administrative code, puts it this way: "(i) Deductions: Generally, a bad debt is reported as a deduction from the measure of the tax previously reported and paid on the excise tax return." That is a US state rule and does not change how a UK VAT return is completed.

Do not net the write-off against unrelated credits. A common shortcut is to clear an old balance by matching it to a payment from the same customer that was meant for a different invoice. That may tidy the account, but it hides the trail. Keep the original payment allocation clear rather than moving a payment simply to clear an old balance.

Which records should you keep before you write off a debt?

Keep the working behind every figure, so that anyone who asks how you reached the final debt figure can see the answer on file. At a minimum, that means the original invoice showing the VAT charged; every payment received, with its date and the invoice it was matched to; copies of reminders and other correspondence showing your collection attempts; the calculation of any amount owed to the debtor and the final debt figure, with the date and method used; and a record of who approved the write-off and when.

Scattered evidence is hard to produce when a question arrives months later. A short covering note helps too: one paragraph stating why you decided the debt would not be paid, the date you decided, and the figures you arrived at. It does not need to be long, but a stranger should be able to follow it without speaking to you. For checking stored documents, see electronic invoice records.

Keep copies outside the accounting system where you can. A software migration or a change of provider should not take the working with it. Once a year, check that your stored copies open and that the figures in them still match the accounts.

Today, choose an unpaid invoice and put its invoice copy, payment history and calculation together. Note any missing evidence before making the write-off entry.

What happens if the customer pays after you have written the debt off?

Record a payment after write-off as a new event and check its accounting and VAT treatment before making the entry.

Check the VAT position as well as the accounts. The write-off file records the position when the debt was written off, so keep any later payment with it for review. Do not assume the treatment mirrors the original write-off. Check the rules and ask your adviser before you make the entry.

Before you contact the customer about the payment, pull the write-off file and read the covering note. You should know why the debt was written off before you discuss it, so the conversation matches what is on record.

Keep the customer relationship in view. A payment after write-off may prompt a review of the account. Decide whether to reopen it, set new terms, or keep it closed, and record that decision. The file should end with a clear note, whatever the outcome, so the next person to open it understands the whole story.

When should a bookkeeper ask for professional advice?

Ask an adviser when the facts step outside the simple case. A supply made in a period where either attribution method was allowed is one example. Partial payments that cover several invoices in a single amount are another. So is a customer whose situation has changed in ways you cannot confirm, because the right record for an uncertain debt can differ from the record for a plainly unpaid one. Write-offs that span more than one tax period also deserve a second pair of eyes, because the timing of the adjustment can change which return it appears on.

When you ask, bring the file rather than a summary. Send the invoice, the payment record, the method note, and the three-figure working, and say which decision you need help with. An adviser who can see the full trail will answer faster and more accurately than one who has to rebuild it from your description.

Advice also helps if you use an allowance. If your business estimates bad debts across the accounts, ask how the estimate is produced and whether individual write-offs reduce that estimate or sit outside it. The answer affects how you record each debt and how you explain the total to the people who rely on your accounts.