There are instances when you may need to write off bad debt in QuickBooks. Bad debts are the money that your customers owe you, but you can’t collect this money from them. When you fail to collect the debt from the customers, you need to write it off from the QuickBooks application as well.
When your invoice becomes uncollectible, you must record them as a bad debt and then write them off. If you are not sure how this procedure works, follow this post until the end. It explains how to write off bad debt in QuickBooks Desktop and Online versions by implementing a few simple steps.
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Bad Debts in QuickBooks – An Overview
Debts are the account receivable items in QuickBooks, against which you send an invoice to the customers. However, when the original invoice goes unpaid, it is known as bad debt. Bad debts can cause trouble during account reconciliation and in running accurate reports.
To record a bad debt, you need to create a new account to track down such transactions in QuickBooks. By creating an account, you can use the Discounts and Credits option within the program to record the debt. It lets you keep your debts organized in a separate register to be considered for tax purposes. Contrarily, maintaining it in the regular customer register can make it difficult for you to track them comprehensively. Also, it keeps your accounts receivable and net income up-to-date.
How To Write Off Bad Debt In QuickBooks Online?
Below are the steps on how to write off bad debt in QuickBooks Online:
1st Step: Check Your Past-Due Account Receivables in QuickBooks
Check the invoices or account receivables you have failed to receive money for (making them bad debts). You can use the Accounts Receivable Ageing Detail report to get it done:
- When in the Accounts Receivable Aging Detail report, take a look at the invoices or account receivables that can be considered bad debts.
- Now, from within the Business Overview menu, select the Reports option.
- After that, open a report on Accounts Receivable Aging Detail and check the outstanding account receivables you need to write off.
2nd Step: Create An Expense Account For Bad Debt
The next step is creating an expense account for bad debt, if you haven’t created one already:
- When in QuickBooks Online, go to Settings and then select Chart of Accounts.
- Locate and select the New option, and it will help you create a new account.
- Next, using the Account Type drop-down menu, select Expenses.
- Now, from the Detail Type drop-down list, select Bad Debts.
- Finally, select Save and then Close to finish this procedure.
3rd Step: Create A Bad Debt Item
Once you have created a new expense account, you need to create a non-inventory item that can take the place of the bad debt. This is not a real item but serves as the balancing act for your accounting.
- First, you need to go to Settings and select the Products and Services option.
- Now, navigate to the upper-right corner to locate and select New >> Non-Inventory.
- Next, in the Name field, enter Bad debts.
- Thereafter, using the Income account drop-down menu, select Bad Debts.
- After making the selection, select Save and Close.
4th Step: Create A Credit Note For The Bad Debt
Moving ahead with the procedure on how to write off bad debt in QuickBooks, you need to create a credit note for the bad debt in this step:
- Select + New as your initial step.
- Next, select the Credit note option to proceed further.
- Now, using the Customer drop-down list, select the customer.
- When in the Product/Service section, select Bad Debts to advance.
- Thereafter, enter the amount you want to write off from within the Amount column.
- When a message appears on the statement box, enter “Bad Debt”.
- After performing the given series of actions, select Save and Close to finish.
5th Step: Apply The Credit Note To the Invoice
Below are the steps to apply the credit note to the invoice, which is now unpaid:
- Again, select + New button to initiate.
- Next, select Receive payment option located underneath Customers.
- Now, using the Customer drop-down list, select the relevant customer.
- After that, from the Outstanding Transactions section, you need to select the invoice.
- When you see the Credits section, select the credit note.
- After applying the note to the invoice, select Save and Close.
- You can now see your unpaid account receivable on your Profit and Loss report underneath the Bad Debts expense account.
6th Step: Run The Bad Debt Report
Once the receivables are listed as bad debts, you can run an Account QuickReport to check them all:
- In the QuickBooks Online Settings section, select Chart of Accounts.
- Now, in the Action column of a bad debts account, locate and select Run report.
You can also add a note to your customer’s name who didn’t pay and differentiate them from the other customers:
- In the Sales section, select the Customers option.
- Now, select the name of the customer.
- Navigate to the upper right section, select Edit.
- When in the Display Name field, type in “Bad Debt” or “No Credit” after the name of the customer.
- In the end, select the Save option to differentiate bad debt customers.
These steps can guide your way through writing off bad debt in the QuickBooks Online application.
How To Write Off Bad Debt In QuickBooks Desktop?
If you are using the Desktop version of the program, below are the steps to write off bad debt in QuickBooks Desktop:
1st Step: Add A New Expense Account To Track The Bad Debt
First things first, you need to add a new expense account by implementing the below-stated steps:
- From within the QuickBooks Desktop’s Lists menu, select Chart of Accounts.
- Once done, select the Account menu and then click New.
- Moving ahead, select Expense and then hit Continue to move ahead.
- Here, you need to enter an Account Name (Bad Debt, for instance).
- Finally, select Save and Close, and the new expense account is added to the Chart of Accounts.
2nd Step: Close Out The Unpaid Invoices
Now that you have an expense account for the bad debts, you can close out the unpaid invoices by applying the following steps:
- When in the QuickBooks Desktop’s Customers menu, select Receive Payments.
- Next, enter the customer’s name in the Received from field.
- In the Payment Amount section, enter $0.00.
- After that, select Discounts and credits.
- Now, in the Amount of Discount field, mention the amount you want to write off.
- For Discount Account, select the expense account you have added in the first step.
- After selecting the account, select Done.
- In the end, select Save and Close option to conclude the task.
On A Final Note!
Writing off bad debts in QuickBooks is crucial for accurate business accounting management. This post elaborates on the processes to write off bad debt in QuickBooks Online and Desktop versions of the program as well. If you are facing any kind of difficulty in implementing the steps, you can contact professionals to look into the matter and extend relevant help.
Frequently Asked Question
1: Why is it important to write off bad debts in QuickBooks?
Writing off bad debts in QuickBooks ensures that accounts receivable and net income remain up-to-date. In case of failure, bad debts can cause errors during the account reconciliation and running accurate reports. It is important to keep your financial records accurate and free from ambiguities.
2: What are the important things you need to keep in mind before writing off bad debts?
Before you start the procedure to write off bad debt in QuickBooks, you need to make sure that it is based on your accounting method. There are different ways to write off bad debts, but make sure that it is according to your accounting method. Therefore, check if it is “Accrual” or “Cash” before getting started.
3: When a debt is considered to be a bad debt?
There are various instances when businesses find themselves incapable of being paid. They sent invoices to their customers for the products sold or services offered. However, when they don’t receive any money after several reminders, they need to mark it as bad debt.
4: How to get rid of the accounting discrepancies?
There are various conditions that can result in inaccuracies in your accounting books, such as reconciliation issues, bad debts, and several others. If you are unable to fix these discrepancies, you can hire professional bookkeepers to get your records right.