A bad debt is an amount owed to your business that is not collectible and is therefore classified as an expense. Bad debt occurs when you have sold a product or service to a customer but the customer did not pay you. After all reasonable efforts are made to collect payment, you can write off bad debt as an expense in your accounting system. Because bad debts are expenses, they appear on the income statement (also called the profit and loss statement) and reduce net income. There are many reasons your customers may not make payment on an invoice, such as poor cash flow management or bankruptcy, and small businesses often need to write off bad debt. Unfortunately, the reality is that some of your customers may not be able to pay and you will need to make the appropriate adjustments to your accounting data.
QuickBooks Online is # 1 in cloud accounting for small businesses1. It organizes all of your accounting data in one central location so that you can accurately track every dollar coming into and going out of your business. It is the easy way to manage your bookkeeping, billing, invoicing, expense tracking, and other basic accounting activities. When you determine that a debt is uncollectible from a customer, QuickBooks Online makes it easy to write off bad debt. Try QuickBooks Online for free.
Easily write off bad debt with QuickBooks Online
QuickBooks Online is the easy way to manage basic bookkeeping and accounting tasks, including writing off bad debt. There are different ways to write off bad debt, and selecting the appropriate approach for your business depends on whether you use the cash accounting method or the accrual accounting method. The cash accounting method is the most commonly used accounting method for small businesses. If you use the cash accounting method, then you record income when you receive payment. With the accrual accounting method you record income when a sales transaction occurs, even if you have not received payment. No matter which accounting method you use, QuickBooks Online makes it easy to write off bad debt.
If you use the cash accounting method, the correct way to write off bad debt is to void or delete the open invoices since they have not been recorded as income. In QuickBooks Online, simply locate the invoice in the Customer Center and click on the Void button on the bottom left-hand side. After voiding the invoice, reopen it and enter "bad debt" in the memo field. It may also be helpful to make a note of the fact that you have been forced to write off bad debt from this customer. To do this, go to Customer Center and add "bad debt" or "no credit" to the customer's name. This is an easy way to quickly identify customers with whom you may no longer wish to do business.
If you use accrual accounting, you can easily setup the allowance method for writing off bad debt in QuickBooks Online. With the allowance method, you estimate bad debts before they occur by creating an Allowance for Bad Debts account. You also create an offsetting Bad Debt Expense account in your Chart of Accounts. To enter the estimated amount of bad debt, simply debit the Bad Debt Expense account and credit the Allowance for Bad Debts account. After a debt is determined to be uncollectible, you can write off the bad debt amount by debiting the Allowance for Bad Debts account and crediting Accounts Receivable.
In QuickBooks Online, it's easy to add and edit accounts to your Chart of Accounts by navigating to Company > Chart of Accounts. To make journal entries to write off bad debt, go to Banking > More > Journal Entry and enter the appropriate information on the intuitive screens. QuickBooks Online is the easy way to manage your accounting data and write off bad debt. Try it for free.