QuickBooks Video Tip: How to Write Off Bad Debt in QuickBooks

Every once in a while you may have to write off bad debt in QuickBooks. Bad debit is essentially money from customers that you are not able to collect. You can continue to chase customers that haven't paid or try using a collection agency.

However, sometimes it is easier and more efficient to fire bad customers and move on. Here is a short video on how to write off bad debt in QuickBooks.

Set up Account and Item

First you will need to set up a new expense account on your QuickBooks chart of accounts for bad debt.

To create a new account, from the menu bar click lists, select chart of accounts, then click the account menu on the lower left and select new. Create a new expense account called bad debt.

Next you will need to set up the QuickBooks item that you want to use for invoicing purposes. Go to lists/item list and select new item from the item dropdown menu in the lower left.

Now select 'Other Charge' as the type and give it a name of 'Bad debt' and put whatever description you desire (you can always over write this on the invoice).

I would leave the rate blank, select tax or non-taxable depending upon your typical transactions and then select bad debt as the account.

Create Credit Memo

There are a lot of different ways to write off bad debt but I prefer creating a credit memo for a few reasons. A credit memo allows you to adjust your sales tax liability and keep your books straight. Simply create a credit memo from your customer menu for the amount you are unable to collect.

If the bad debt amount you are writing off was originally taxed, tag the bad debt line item as taxable, otherwise set it to non-taxable.

I typically will put the invoice number that is being written off in the description field. Although this can be traced via the transaction history it just makes it easier to track what happened.

Now all you have to do is offset the credit memo against the invoice that needs to be written off. When you save the credit memo it should bring up a message asking if you want to retain the credit, issue a refund or apply to an open invoice.

You should select apply to open invoice and offset the credit memo against the invoice that needs to be written off.

If you forget to do so or choose to do this later you will need to offset the credit against the open invoice through the receive payments function for that customer.  

Alternative Procedures

Use Discounts - You can write off bad debt through the discounts and credits section of the receive payments section.

• Select customers/receive payments and select the customer with the bad debt from the drop down menu item under 'received from'. 
• Highlight (but do not check) the invoice that needs to be written off.  
• Click on 'Discounts and credits'
• Enter the amount of discount and select your 'Bad debt' expense account on the 'Discount Account' dropdown. 

Although this method will zero out the invoice and write off the bad debt it does not adjust the sales tax payable liability. Therefore, using a credit memo is better if you charge sales tax.

If you do have to write off bad debt it is important to understand the correct way to do it based upon your unique situation. You don't want to follow the wrong method and screw up your books. I would just keep things consistent and use a credit memo as your preferred way to write off bad debt.