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Bad Debt Write-Offs: A 2026 Guide

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  Published in Business and Finance on Thursday, January 22nd 2026 at 8:29 GMT by Ghanaweb.com
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What is a Bad Debt Write-Off?

A bad debt write-off isn't about magically erasing a customer's obligation. It's an accounting adjustment that recognizes the likelihood of non-payment. This process removes the debt from a company's balance sheet - no longer listed as an asset - providing a more transparent and realistic view of the organization's financial standing to investors, creditors, and stakeholders. The debt still exists; the company simply acknowledges it's unlikely to be recovered.

Why Are Write-Offs Necessary in 2026?

The reasons for implementing bad debt write-offs remain fundamentally the same, but their importance is amplified in today's volatile economic climate.

• Accurate Financial Reporting & Investor Confidence: With increased scrutiny from regulators and a more discerning investor base, presenting an accurate picture of a company's assets is paramount. Overstating assets to inflate perceived value can trigger regulatory investigations and damage investor trust. The rise of AI-driven financial analysis tools in 2026 has made detecting discrepancies even easier.
• Tax Implications - A Shifting Landscape: Tax regulations surrounding bad debt deductions are constantly evolving. While principles remain consistent, specific rulings and interpretations change with economic conditions and government policy. Staying abreast of these changes is critical to avoid penalties and optimize tax strategies.
• Regulatory Compliance & Auditing Standards: Accounting standards like IFRS and US GAAP mandate the periodic review and write-off of uncollectible accounts. Independent audits increasingly prioritize the accuracy and integrity of debt management processes. The increasing use of blockchain technology for auditing requires even greater transparency in write-off procedures.

The Mechanics of a Write-Off

The accounting entry for a bad debt write-off is straightforward, yet has significant implications:

1. Debit Bad Debt Expense: This increases the expense on the income statement, reducing the company's reported profit for the period.
2. Credit Accounts Receivable: This directly reduces the amount the customer owes, shrinking the Accounts Receivable balance on the balance sheet.

Importantly, while Accounts Receivable decreases, the overall asset value on the balance sheet remains unaffected. The expense offsets the reduction in receivables, maintaining balance sheet equilibrium.

Tax Considerations: Ghana and Beyond (2026 Updates)

The complexities of bad debt tax deductions are consistent across many jurisdictions, but specific requirements differ. Referencing Section 33 of Ghana's Income Tax Act (Act 896) offers a useful example. Key requirements remain:

• Debt must be demonstrably related to the business's trade or operations.
• It cannot represent a capital expenditure.
• Robust documentation providing credible evidence of uncollectibility is mandatory.

Crucially, any expense already recognized (e.g., through an allowance for doubtful debts) cannot be claimed again as a write-off. This rule remains strictly enforced, with automated compliance checks in 2026 significantly reducing tolerance for errors. Companies operating internationally must be acutely aware of each jurisdiction's tax laws regarding bad debt deductions.

The Allowance for Doubtful Debts: A Proactive Approach

Instead of waiting for debts to become hopelessly uncollectible, many companies proactively utilize an allowance for doubtful debts. This estimated reserve anticipates potential losses and is recorded as an expense, reducing the face value of accounts receivable. The allowance provides a more conservative view of asset value and can mitigate the impact of unexpected defaults.

Essential Policy for Bad Debt Management (2026 Best Practices)

A robust and clearly defined policy is the bedrock of effective bad debt management:

• Uncollectibility Criteria: Establish precise, measurable criteria for identifying uncollectible debts. These may include prolonged non-payment, bankruptcy filings, or evidence of financial distress. AI-powered credit risk assessment tools are now commonplace, informing these criteria.
• Collection Procedures: Document all collection efforts rigorously, including communication logs, legal notices, and payment plans. Digital record-keeping is essential.
• Approval Process: Implement a layered approval process for write-offs, requiring multiple levels of authorization based on the debt's value.
• Regular Review: Conduct frequent reviews of accounts receivable, reassessing debt collectability and adjusting the allowance for doubtful debts accordingly. Automation and data analytics are vital for efficient reviews.
• Fraud Prevention: Given the potential for abuse, policies must include measures to prevent fraudulent claims and ensure the legitimacy of write-offs. This includes enhanced due diligence and reconciliation processes.

By proactively implementing and adhering to a strong bad debt management policy, businesses can navigate the complexities of credit risk, maintain financial accuracy, and strengthen their overall financial resilience in an ever-changing economic landscape.