What is Bad Debt Expense?

Bad debt expense is an accounting entry that recognizes the portion of accounts receivable that a business does not expect to collect. When a freelancer invoices a client and the client never pays -- despite collection efforts -- that unpaid invoice eventually becomes a bad debt. Recording it as a bad debt expense removes the uncollectible amount from accounts receivable and recognizes it as a loss on the income statement. For cash-basis freelancers (which is most sole proprietors), this is handled differently than for accrual-basis taxpayers: cash-basis filers never recognized the income until payment was received, so there is no income to offset; accrual-basis businesses recognize income when invoiced and later deduct the bad debt when it becomes clear it will not be collected.

Bad debt expense works differently depending on whether you use cash or accrual accounting. Under the direct write-off method (common for cash-basis taxpayers), you recognize the bad debt expense when the account is determined to be uncollectible -- when collection efforts have failed and the debt is worthless. Under the allowance method (required for accrual-basis companies under GAAP), you estimate the percentage of receivables that will not be collected at the end of each period and create a reserve called an allowance for doubtful accounts. This reserve reduces accounts receivable on the balance sheet and records the estimated bad debt expense before specific accounts actually fail. Most freelancers use cash accounting, so the bad debt write-off process is straightforward: document the failed collection efforts and write off the amount.

For freelancers and small business owners, bad debt is a practical reality. Clients go bankrupt, disappear without paying, or dispute invoices in bad faith. A 2022 survey found that more than 70% of US freelancers experienced late or non-payment in the prior year. While prevention is always preferable -- requiring deposits, checking client creditworthiness, using contracts with payment terms -- some bad debt is inevitable. For tax purposes, cash-basis freelancers generally cannot deduct uncollected invoices as bad debt because they never included the income in their taxable revenue. Accrual-basis businesses can deduct the written-off amount. If you used the accrual method and recognized the income, document your collection efforts and write the amount off against your bad debt expense account.

Bad debt expense is the actual write-off of a specific uncollectible account. A doubtful account reserve (or allowance for doubtful accounts) is an estimate of future bad debts recorded before specific accounts are identified as uncollectible. The direct write-off method records bad debt expense when an account is actually deemed uncollectible -- simple but potentially distorting because it recognizes the loss long after the revenue was recorded. The allowance method estimates bad debt at period end, matching the potential loss to the revenue period in which it was earned -- more accurate but requires forecasting. For freelancers using cash accounting, neither accrual method applies; the focus is simply on whether to pursue collection further and whether the debt has any tax implications.

To write off a bad debt: First, document all collection efforts: emails, calls, demand letters, and any client responses. Second, determine that the debt is genuinely uncollectible -- the client is bankrupt, unreachable, or has formally disputed and refused payment after extended negotiation. Third, if you use accrual accounting, record a journal entry debiting bad debt expense and crediting accounts receivable. Fourth, if you are a cash-basis taxpayer, note that you cannot deduct the uncollected invoice as a bad debt (you never reported it as income), but you may be able to deduct any direct costs you incurred producing the work. Fifth, consult a tax professional about whether any other deduction applies. Sixth, consider referring the debt to a collection agency or pursuing small claims court before writing it off entirely.

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1. Waiting too long to pursue collection -- the older a debt, the less likely you are to recover it; follow up on overdue invoices at 30 days, 60 days, and 90 days. 2. Assuming cash-basis freelancers can deduct bad debts on taxes -- cash-basis taxpayers cannot deduct uncollected invoices because the income was never reported. 3. Failing to document collection efforts -- if you later need to prove you made reasonable efforts to collect, you need written records of every communication. 4. Writing off a debt before exhausting reasonable collection options -- consider a payment plan, a collection agency, or small claims court before giving up. 5. Confusing a bad debt with a disputed invoice -- a disputed invoice requires resolution, not a write-off; address the dispute first and write off only what remains uncollectable after resolution.

Learn more about related topics: [Accounts Payable Aging](/glossary/accounts-payable-aging), [Collection Agency](/glossary/collection-agency), [Invoiced](/glossary/invoiced), [Gross Amount](/glossary/gross-amount).