Write off Accounts Payable

Writing off accounts payable is the process that a company removes its accounts payable from the balance sheet.

Accounts payable is the current liability present on the company balance sheet. It is the amount the company owes to the suppliers regarding the purchase on credit. The company has consumed the goods or services from suppliers and promised to pay them back later. It depends on the sale and purchases agreement.

The company has the obligation to settle the accounts payable within a certain period of time. If the company makes payments late, it will impact the relationship with the suppliers. The suppliers also need cash to pay for materials, labor, and other stakeholders.

The suppliers will not deliver new products or reject new orders unless the prior payments are made. The suppliers may change the credit term with the company to prevent any credit purchase in the future. In a serious case, the supplier may decide to file a lawsuit against the company.

As we can see, accounts payable are the company’s obligation toward other parties. It is not easy to write off the balance without impact on other parties. If we write off accounts payable, it means other parties will not receive payment, so they will take different actions to collect the cash.

It is different from the accounts receivable which we can write off when we are unable to collect the cash from customers.

IFRS9 – Accounts Payable

Once the deadline for payment has passed, the entity’s liability does not automatically end. The creditor may still take legal action to recover the debt, and the debtor may still be required to pay interest and late fees.

In some cases, the creditor may also report the delinquent debt to credit bureaus, which can damage the debtor’s credit score. As a result, it is important for both parties to understand their rights and obligations after the payment deadline has passed. Failure to do so could result in significant financial penalties.

Accounts payables are usually not written off based on the time frame, while on the other hand, accounts receivables are often written off when there is a substantial time passed. The main reason for this discrepancy is that accounts payable generally represent money that a company owes to suppliers, while accounts receivable represent money that is owed to the company.

The prudence concept is important in the field of accounting because it helps to ensure that financial statements are fair and accurate. This concept dictates that income and assets should be reported conservatively, while expenses and liabilities should be reported cautiously. It prevents the company from overstating revenue/assets and understating expense/liability.

In order to write off the accounts payable, the company has to prove that the obligation is discharged, canceled, and expired.

When should we write off accounts payable?

Liability discharge

When a company or individual incurs a liability, they become obligated to pay that amount. This payment can be through cash payments or by using other assets. Once the obligation is paid, the creditor is released from their debt and the company or individual is no longer liable for that payment.

This payment process is known as liability discharge/release. Liability release is an important part of business and finance, as it allows companies and individuals to protect themselves from possible future liabilities.

It is also a way to ensure that creditors are paid in full and on time. When a company or individual fails to pay its debts, it can have serious actions, both financially and legally. As such, liability release is a vital tool for managing risk and ensuring the financial stability of businesses and individuals.

The company can reduce the liability amount depending on the number of resources paid to the supplier. Most of the time, the company uses cash to settle the account payable balance.

The liability is fully discharged when the company fulfills its obligation by paying the cash or other assets to settle with suppliers.

The journal entry is debiting accounts payable and credit cash/other assets.

Account Debit Credit
Accounts Payable $$$
Cash/Other assets $$$

Cancellation of Liability

In some cases, accounts payable may be canceled through legal or operational action. For example, if the payable party is entitled to a refund or credit for the full or partial balance, they may choose not to pay the remainder.

For example, if the vendor has breached the terms of the contract, the company may be entitled to cancel the account and withhold payment. This can be done by sending a written notice to the vendor, outlining the breach and specifying the date that the account will be canceled. The vendor will then have a chance to take action. If they are unable to do so, or if they refuse to comply with the company’s request, then the company can proceed with canceling the account and withholding payment. It will depend on the term of the contract between supplier and buyer, the supplier always has room for negotiation.

Alternatively, if the company goes out of business, all accounts payable are automatically canceled and no further payments are owed.

The journal entry is debiting accounts payable and crediting other incomes.

Account Debit Credit
Accounts Payable $$$
Other Income $$$


The contractual terms may specify that there must be a duration in which the creditor has to claim the balance from the debtor, or after such a duration, the creditor may not have the power to claim the balance.

The law relating to this is complex, and there are many defenses that a debtor may have against a claim by a creditor. However, if a debtor does not pay a debt when it is due, the creditor may be able to take action to recover the debt, including suing the debtor.

In some jurisdictions, there is a statute of limitations that specifies the maximum amount of time that a creditor has to file a lawsuit to collect a debt. Once the statute of limitations expires, the creditor can no longer sue the debtor to collect the debt.

After the accounts payable have passed the duration, the company has the option to write them off. The journal entry is debiting accounts payable and credit other income.

Account Debit Credit
Accounts Payable $$$
Other Income $$$