A Complete Guide to Write Off Bad Debt in QuickBooks
The QuickBooks accounting software is popular among various small, mid-sized, and even large enterprises. It offers advanced tools and functionalities that make accounting and bookkeeping tasks simpler. One major operation that accountants regularly conduct is to write off bad debts in QuickBooks.
This is a critical problem that many businesses face. It is crucial for them to write off bad debts immediately so that they do not interfere with the accuracy of their transactions.
Bad debt essentially means that your customer owes you some money, but you cannot collect it. As a business owner, you know that getting paid in this case is not possible. This article will explain how to write off bad debts in QuickBooks.
What Does It Mean to Write off Bad Debt in QuickBooks
Some client invoices are never paid. It means the amount that was to be received from the customer fails to be recovered in your organization. When you write off bad debts, it becomes simpler to monitor the average net turnaround and profit.
Bad debt complicates reconciling particular accounts and running accurate reports. Before you record a bad debt in QuickBooks, it’s essential to make an account to monitor such transactions.
After writing bad debts in this accounting solution, you can clear the invoices and accounts receivable. This, in turn, will enable you to get the net profit amount in QuickBooks.
How to Write off Bad Debt in QuickBooks Online
You can write off bad debts in QuickBooks Online by following a six-step process. A detailed explanation is below.
- Find which accounts receivable need to be written off
This step involves checking the Accounts Receivable Aging Detail report to find which receivables or invoices need to be put under the bad debt category.
- In ‘Business Overview,’ choose ‘Reports.’
- Open the ‘Accounts Receivable Ageing Detail’ report.
- Find out which accounts receivable you need to write off.
2. Make a bad debts expense account.
- In ‘Settings,’ choose ‘Chart of Accounts.’
- Tap ‘New’ on the upper-right portion.
- Now choose ‘Expenses’ from the Account Type drop-down.
- Click ‘Bad Debts’ from the Detail Type drop-down.
- Input ‘Bad Debts’ in the Name field.
- Finally, hit ‘Save and Close.’
3. Make a non-inventory item.
This non-inventory item serves as a proxy for the bad debt to balance your accounting.
- In ‘Settings,’ choose ‘Products and Services.’
- Choose ‘New’ in the upper-right portion.
- Now select ‘Non-inventory.’
- Input ‘bad debts’ in the Name field.
- Hit ‘Bad debts’ from the Income Account drop-down.
- Finally, click ‘Save and close.’
4. Make a credit memo for the bad debt.
Credit memos allow sellers to avoid bad debt if any customer cannot pay for goods or services. This is the next step to write off bad debts in QuickBooks.
- Hit ‘+ New.’
- Now choose ‘Credit memo.’
- From the Customer drop-down, choose ‘Customer.’
- Now choose ‘Bad debts’ in the ‘Product/Service’ tab.
- Input the amount you want to write off in the ‘Amount’ column.
- Now, input ‘bad debt’ in the message displayed in the Statement box.
- Finally, hit ‘Save and Close.’
5. Use the credit memo for the invoice
- Choose ‘+ New.’
- Choose ‘Receive payment’ before Customers.
- From its dropdown, choose a suitable customer.
- Select your invoice from the section ‘Outstanding Transactions.’
- Now, pick the credit memo from the ‘Credits’ section.
- Choose ‘Save and Close.’
- You will see the uncollectable receivable in your bad debt expense account.
6. Check the receivables tagged as bad debt.
The final step to write off bad debts in QuickBooks Online is running the bad debt report.
- Head to ‘Settings.’
- Now, pick ‘Chart of accounts.’
- Select ‘Run report’ in the ‘Action’ column.
The Process to Write Off Bad Debt in QuickBooks Desktop
In order to write off bad debt in QuickBooks Desktop, you should first make an expense account. After that, close out the unpaid invoices.
- Add an expense account for the bad debt
Open QuickBooks and follow these points.
- Navigate to the ‘Lists’ menu.
- Here, choose ‘Chart of accounts.’
- Now, pick the ‘Account’ menu.
- Here, select ‘New.’
- Choose ‘Expense’ to create an expense account.
- After that, select ‘Continue.’
- You can now name that account ‘Bad Debt.’
- After making an expense account, choose ‘Save and Close.’
2. Close out the unpaid invoices.
The last step in writing off bad debt in QuickBooks Desktop is closing off the unpaid invoices.
- Head over to the ‘Customers’ menu.
- Here, choose ‘Receive Payments.’
- Next, type the customer’s name in the ‘Received From’ field.
- As the payment amount, input $0.00.
- After that, pick the ‘Discounts and Credits’ option.
- Type in the amount to write off in the ‘Amount of Discount’ field.
- Now, choose the account that you created in the first step for ‘Discount Account.’
- After doing that, choose ‘Done.’
- In the end, select ‘Save and Close.’
Why Should You Write Off an Invoice in QuickBooks?
There are two crucial reasons to write off an invoice.
- At times, your clients will not be able to pay an invoice due to unavoidable circumstances. Although this is a rare case, it does happen. Whenever a customer is unable to make a payment, you must write off that invoice and duly recognize this default.
- Another reason to write off invoices is when your customer has made a payment, but there’s still a balance (usually small) due on it. In most cases, this amount is very small. So, you may not really reach out to your client to get the remaining payment.
Ways to Avoid Unpaid Invoices
Do you often catch yourself asking how to write off bad debt in QuickBooks? It would help if you ensured that your invoices were paid on time. Here are some ways to avoid this situation.
1. Progress billing
Progress billing means invoicing your clients incrementally according to the amount of work you’ve completed. This process is ideal for a long-term project. It will also help you in case your client is in an unstable financial position.
Begin by creating a contract defining how you will bill for different project milestones. After that, give your client a timeline and the amount they will give you at each stage.
2. Invoice financing
In this process, lenders give you cash as collected from your unpaid invoices. You may get an advance on 85% of the overall worth of your unpaid invoices. So, as long as you have outstanding receivables, you are eligible for invoice financing.
Bear in mind that the lender will charge a 3% processing fee and a ‘factor fee’ based on the time it takes for your client to pay. It’s computed on a weekly basis.
Frequently Asked Questions
Q1. How can I recognize bad debts in QuickBooks?
To find bad debts in QuickBooks, check your Accounts Receivables Ageing report. Here, you will see invoices that are past the payment date. If you’ve tried many times to collect payment and feel that it is uncollectible, it comes under bad debt.
Q2. How can I write off overpayments on my QuickBooks Desktop?
You can write off overpayments in QuickBooks Desktop by going to the ‘Customers’ menu. Select ‘Create invoices.’ Now tap the customer name and choose ‘Minor charge-off’ in the Field-Off Item. Input the overpayment amount. Finally, click ‘Apply credits.’
Q3. What are the two methods to write off bad debt expenses?
The two ways to write off bad debt expense are the Accounts Receivable Ageing method and the percentage sales method. You can write off bad debt on individual and business tax returns.
Q4. Should I consider writing off bad debt an expense?
Usually, a bad debt is a loss from the loss of value of a debt that was either made or acquired in a trade. You can deduct it on Schedule C Form 1040, Profit or Loss from Business, or on your business income tax return. The key examples of bad debt include loans to clients, credit sales to customers, and business loan guarantees.
Learning to write off bad debt in QuickBooks is crucial to ensuring that your accounts receivable and net income are up-to-date. Otherwise, you cannot trust the preciseness of your reports. Follow the instructions in this article whenever you need to write off bad debts in QuickBooks Online or Desktop. if you feel confused about the process or have any other queries, contact a QuickBooks technical expert.