Our small business prepaid a contracting agency (software development) to complete some work for us. We booked the A/P accrual against the assets prepaid expenses account, since that's what we would normally do when we prepay a vendor (such as an insurance company) for a whole year when we'll later receive the services throughout the year.

The contracting company reneged on the contract, didn't complete the work, and refuses to return the funds. It's a material amount, but no so much that it's worth having an expensive legal battle over, so we want to write the expense off on our books this fiscal year. If this were a regular receivable, I'd write it off to our bad debt expense account, but I've never written off an asset account into bad debt. Is bad debt still the recommended expense account to use? If not, what account is recommended?

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