Always consult with the company’s specific accounting policies and procedures to ensure the correct handling of such transactions. By recording this journal entry, the firm removes the $5,000 outstanding balance from its accounts receivable, acknowledging that it is unlikely to collect this amount. The bad debt expense account reflects the cost incurred by the company due to the uncollectible debt. Written-off assets represent a crucial step in financial management, aligning a company’s financial records with the reality of its operational landscape.

Accounting for Asset Disposal

If the company that owes the money is liquidated, the unsecured lender receives money only after the secured lenders have been paid. The seller refers to the invoice as a sales invoice and the buyer refers to the same invoice as a vendor invoice.