A Practical Next Step Beyond “Don’t Use Credit Memos”
In a recent post, Don’t use Credit Memos for Bad Debt Allowances in BC, I focused on a common issue I see in Microsoft Dynamics 365 Business Central environments — using credit memos to handle bad debt.
The core takeaway was simple:
- Allowance is an estimate
- Write off is a settlement
- Credit memos are neither
This post builds on that foundation.
From Concept to Execution
One of the most valuable pieces of feedback on that post was a request to tie the allowance back to specific invoices.
That question often comes from a place of practical need:
- Which invoices make up this amount
- How do I support this number
It can also come from confusion between two steps that are sometimes treated as one — particularly in environments where only the write off step is recorded financially.
That is not uncommon.
Clarifying the Two Step Model
Based on IFRS, US GAAP, and French GAAP (PCG), the structure is consistent:
- Step 1 — Allowance for Doubtful Accounts (summary, G/L only)
- Step 2 — Write off (specific, invoice level)
Allowance answers:
What do we think we will not collect
Write off answers:
We are not collecting this
Even in environments where practice leans heavily toward invoice level write offs, the distinction still exists in the accounting framework.
Where the Tie Back Question Fits
The request to tie allowance to detail is valid.
But the solution is not to:
- Post allowance by invoice
- Change posting structures
- Force transaction level accounting
Instead:
- Identify at the invoice level
- Value at the summary level
- Document at the write off stage
This preserves:
- Clean aging
- Accurate valuation
- Clear audit trail
Step 1 — Build a Repeatable Population Using Customer Ledger Entries
Start with Customer Ledger Entries.
Filter for your base population:
- Open = Yes
- Remaining Amount > 0
- Due Date older than your threshold (for example, 120 days)
This creates your initial risk population.
This step is not accounting.
This is identification.
Step 2 — Use Dispute Status as a Controlled Flag
Instead of tracking this outside the system, use Dispute Status intentionally.
Create a status such as:
- Allowance Review
- Doubtful
Then:
- Review the filtered entries
- Update Dispute Status only where appropriate
Tip:
Edit in Excel can be used to update Dispute Status efficiently across multiple Customer Ledger Entries.
This gives you:
- Invoice level traceability
- A consistent review process
- A defensible audit trail
Important:
Dispute Status is not accounting logic.
It is a controlled classification tool.
Step 3 — Create the Allowance Calculation
Now filter:
- Open Customer Ledger Entries
- Dispute Status = Allowance Review
Export to Excel or use analysis:
- Sum Remaining Amount
This is your required Allowance for Doubtful Accounts balance.
At this point:
- If invoices are paid, they fall out of the population
- If invoices are written off, they fall out of the population
Your next calculation reflects current exposure
You are not tracking individual reversals.
You are recalculating the required balance.
Step 4 — Post the Allowance (Summary Entry Only)
Post a General Journal entry for the difference between current balance and required Allowance for Doubtful Accounts:
| Transaction Type | G/L Account | Debit | Credit |
|---|---|---|---|
| Allowance Entry | Bad Debt Expense | ||
| Allowance Entry | Allowance for Doubtful Accounts |
Key points:
- No Customer Ledger impact
- No change to aging
- No invoice level posting
This is valuation.
Not settlement.
Step 5 — Write Off Specific Invoices When Confirmed
When an invoice is confirmed uncollectible:
Use a Cash Receipt Journal.
Enter:
- Account Type = Customer
- Amount = negative
- Balancing Account = Allowance for Doubtful Accounts (if Step 1 exists) or Bad Debt Expense
- Apply to the invoice
Conceptually:
- Normal: Customer to Bank
- Write off: Customer to Allowance for Doubtful Accounts
Same process. Different destination.
The result:
- Invoice is closed
- Removed from aging
- Properly reflected in both G/L and subledger
Step 6 — Document the Write Off
This is where the audit trail lives.
Use:
- Description including Customer and Invoice
- Attachments for support (emails, collection notes, legal notices)
- Comments if needed
This answers the real question behind the original feedback:
What supports this number
Not the allowance entry itself.
The documentation at the write off stage.
The Full Model in Practice
- Identify risk at the invoice level
- Flag using Dispute Status
- Calculate Allowance for Doubtful Accounts as a summarized balance
- Adjust each period
- Write off specific invoices with documentation
This creates:
- Clean aging
- Accurate valuation
- Clear traceability
The 80 Percent Solution
You do not need full automation.
A strong, repeatable process is:
- Saved view: Open CLE over 120 days
- Review and flag using Dispute Status
- Sum flagged entries
- Post one allowance adjustment
- Write off with documentation when appropriate
This solves the real problem without overengineering the system.
The Bottom Line
There are only two states:
- Still a receivable → reflected through Allowance for Doubtful Accounts
- Not collectible → written off and removed
There is no state where an invoice is written off and still part of receivables.
When you:
- Separate identification from valuation
- Keep accounting at the right level
- And document at the right step
You get a process that works operationally and holds up under audit.
That is the Righter Way.
Created as part of Sharing the Righter Way, this article combines my Business Central experience with AI-supported research and drafting. AI helps me explore options and accelerate analysis, while every conclusion and recommendation reflects my own professional judgment.
