If you are using the Accrual method of accounting and you extend credit to your Customers, as soon as you create an Invoice it is recorded in QuickBooks® as an Accounts Receivable.
Unfortunately, you will not always collect all credit you have extended. From time to time you will have Bad Debt – money you billed to a Customer that will never be collected.
Generally, you should write off bad debt only after exhaustive efforts to collect. For any significant amounts, you should call the customer until you are convinced that the customer cannot or will not pay.
At the end of the year, you will want to write off the outstanding customer invoices you know are not going to be paid.
First, check to see if this account and item have already been set up in your QuickBooks® file. Go to Lists, Chart of Accounts and look for an account named Bad Debt Expense. Go to your Item List and look for an Other Charge Item called Bad Debt or Write Off. If these are already on your lists, you can skip both Step 1 and Step 2.
Step 1: Create an Account for tracking Bad Debt Expense
This is a one-time setup task.
- Go to the Lists menu and click Chart of Accounts
- Click Account at the bottom of the list and then click New
- Under Account Type choose Expense and then click Continue
- If you are using account numbers, enter the number in the Numbers field
- In the Account Name field, enter “Bad Debt Expense”
- Click Save & Close
Step 2: Create an Item that points to your Bad Debt Expense account
This is also a one-time setup task.
- Go to the Lists menu and click Item List
- Click Items at the bottom of the list and then click New
- Under Type choose Other Charge and name it “Bad Debt”
- In the Amount or % field, leave a zero
- From the Tax Code list, choose Non (if you use Tax Codes)
- In the Account field, select the account you created in Step 1 – Bad Debt Expense
- Click OK
Step 3: Use the Item you created in Step 2 to generate a Credit Memo*
- Click Customer Center
- On the Customers & Jobs tab, select the customer whose account you will not be able to collect
- Right-click and choose Create Credit Memos/Refunds
- Use the Bad Debt item for the amount of the unpaid invoice (s) that you are writing off
- Click Save & Close
*Creating a Credit Memo is the preferred method to write off Bad Debts, especially if the original sale included Sales Tax. We have not included the specific procedures for writing off a bad debt with Sales Tax. Please call for additional guidance if you are presented with this issue.
Step 4: Apply the Credit
In the available credit window that appears when you Save & Close the Credit Memo, it asks “what would you like to do with this credit?”
- Click Apply to an Invoice
- Click OK
- Select the Invoices that you are writing off
- Click Done
Every bad debt has a story and you need to talk to customers who refuse to pay their invoice. Discussing the reason for nonpayment may provide you the information necessary to prevent the problem from occurring again. Be proactive and contact the customer as soon as the invoice is late.
This article of QuickBooks Tips and Tricks was based on the 2012 version of QuickBooks.