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Write off bad debt in QuickBooks Online

by Intuit•28• Updated 5 days ago

When invoices you send in QuickBooks become uncollectible, you need to record them as a bad debt and write them off.

Before you start

The method you choose should be based on your accounting method:

  • Accrual: your business reports income and expenses for completed and pending transactions.
  • Cash: your business only reports the income and expenses for completed transactions.

Talk to your accountant before following these guides to ensure that it's the best method for your company.

You can use this method if the amount you are writing off will significantly affect your gross sales.

1. Create a bad debt expense account

  1. Go to Settings ⚙ and select Chart of accounts (Take me there).
  2. At the upper right, select New.
  3. From the Account Type ▼ dropdown, select Expenses.
  4. From the Detail Type ▼ dropdown, select Bad debts.
  5. In the Name field, enter “Bad debts.”
  6. Select Save and close.

2. Create a bad debt item

  1. Go to Settings ⚙. Under Lists, select Products and Services.
  2. At the upper right, select New, and then Non-inventory.
  3. In the Name field, enter “Bad debts.”
  4. From the Income account ▼ dropdown, select Bad debts.
  5. Select Save and close.

3. Create an adjustment note for the bad debt

  1. Select + New.
  2. Under Customers, select Adjustment Note.
  3. Under the Customer ▼ dropdown, select the appropriate customer.
  4. In the Product/Service section, select Bad debts.
  5. In the Amount column, enter the amount you want to write off.
  6. In the Message displayed on statement box, enter “Bad Debt.”
  7. Select Save and close.
  8. Enter your password and then select Yes to confirm.

4. Apply the adjustment note to the invoice

  1. Select + New.
  2. Under Customers, select Receive Payment.
  3. From the Customer ▼ dropdown, select the appropriate customer.
  4. From the Outstanding Transactions section, select the invoice.
  5. From the Credits section, select the adjustment note.
  6. Select Save and close.

The most common method of recording bad debts is using the allowance for bad debts account.

1. Create a bad debt expense account

  1. Go to Settings ⚙ and select Chart of accounts (Take me there).
  2. At the upper right, select New.
  3. From the Account Type ▼ dropdown, select Expenses.
  4. From the Detail Type ▼ dropdown, select Bad debts.
  5. In the Name field, enter “Bad debts” or “Uncollectible debts.”
  6. Select Save and close.

2. Create an allowance for the bad debt account

  1. Select the Settings ⚙ icon. Under Your Company, select Chart of Accounts.
  2. At the upper right, select New.
  3. From the Account Type ▼ dropdown, select Current Assets.
  4. From the Detail Type ▼ dropdown, select Allowance for bad debts.
  5. In the Name field, enter “Allowance for bad debts.”
  6. Select Save and close.

3. Create a bad debt item

  1. Select the Settings ⚙ icon. Under Lists, select Products and Services.
  2. At the upper right, select New, and then Non-inventory.
  3. In the Name field, enter “Bad debts.”
  4. From the Income account ▼ dropdown, select Allowance for bad debts.
  5. Select Save and close.

4. Create an adjustment note for your invoice

  1. Select + New.
  2. Under Customers, select Adjustment Note.
  3. From the Customer ▼ dropdown, select the appropriate customer.
  4. In the Product/Service section, select Bad debts.
  5. In the Amount column, enter the amount you want to write off.
  6. In the Message displayed on statement box, enter “Bad Debt.”
  7. Select Save and close.

5. Apply the adjustment note to the invoice

  1. Select + New.
  2. Under Customers, select Receive Payment.
  3. From the Customer ▼ dropdown, select the appropriate customer.
  4. From the Outstanding Transactions section, select the invoice.
  5. From the Credits section, select the adjustment note.
  6. Select Save and Close.

6. Enter a journal entry for the allowance account

  1. Select + New.
  2. Under Other, select Journal Entry.
  3. Enter the correct journal date.
  4. In the first line, select or enter the following:
    • Account ▼ dropdown: Allowance for bad debts
    • Debit: amount you want to write off
    • Description: enter “To write off bad debt - [customer name]”
    • Name: customer name
  5. In the second line, select or enter the following:
    • Account ▼ dropdown: Accounts Receivable (A/R)
    • Credit: (the amount auto-populates)
    • Description: enter “To write off bad debt - [customer name]”
    • Name: customer name
  6. In the Memo box, enter “To write off bad debt - [customer name].”
  7. Select Save.

7. (Optional) Create a recurring bad debt expense journal entry

  1. Estimate your yearly bad debt expense, then divide it by 12.
  2. Select the Settings ⚙ icon.
  3. Under Lists, select Recurring Transactions.
  4. From the Transaction Type ▼ dropdown, select Journal Entry.
  5. Name the template, set the type to Scheduled, then change the interval and the start date.
  6. In the first line, select or enter the following:
    • Account ▼ dropdown: Bad debts.
    • Debit: monthly estimated bad debt amount.
    • Description: enter “Estimated bad debt.”
  7. In the second line, select or enter the following:
    • Account ▼ dropdown: Allowance for bad debts
    • Credit: the amount auto-populates.
    • Description: enter “Estimated bad debt”
    • Name: customer name
  8. In the Memo box, enter “To write off bad debt - [customer name].”
  9. Select Save template.

If a customer pays an invoice or an amount that you wrote off, you just need to void the adjustment note and the journal entry (for Allowance method) to restore the accounts receivable so you can pay it off.

Note: If you wrote off the bad debt in a prior year, talk to your accountant before making any changes.

  1. Go to Sales and select Customers (Take me there).
  2. Select the customer’s name.
  3. Find and open the adjustment note you want to undo.
  4. Select the dropdown arrow next to Actions, and then select Void.
  5. Confirm you want to void the adjustment note by selecting Yes.
  6. Go back to Sales, then select All sales (Take me there).
  7. Find and open the journal entry you want to undo.
  8. At the bottom, select More, and then Delete.
  9. Confirm you want to delete the journal entry.

You can now record the payment for the invoice as you normally do.

If you file your taxes on cash basis, you can void the invoice since they haven’t been reported as income yet. To do this:

  1. Go to Sales and select Invoices (Take me there).
  2. Find and select the uncollectible invoice.
  3. Under the GST column, change all the sales tax rate to Out of Scope (0%).
  4. At the bottom, select More, then Void.
  5. Confirm you want to void the invoice.
  6. Reopen the invoice.
  7. In the Message on statement box, enter “Bad debt” after Voided.
  8. Select Save.
Does your invoice have billable expenses, billable time, charges, or credits?

If it does, we don’t recommend voiding the invoice. You can write it off by adding products/services with a negative amount to the invoice.

  1. Create a bad debts expense account. Check out the steps under Direct method.
  2. Create a bad debts item. Check out the steps under Direct method.
  3. In the next line, add the original product/service on the invoice, then enter the same amount as a negative.
  4. In the following line, add the bad debt item, then enter the original billable amount as a negative.
  5. Select Save.
  1. Go to Sales and select Invoices (Take me there).
  2. Find and select the uncollectible invoice.
  3. Under the GST column, change the sales tax rate for the bad debt to Out of Scope (0%).
  4. In the next lines, select the corresponding products/services for the bad debt.
  5. In the amount column, enter the balance for each product/service as a negative amount.
  6. In the Message on statement box, enter “Bad Debt.”
  7. Select Save.

Next Steps

To make it easier for you to identify bad debts in the future, you can add a note next to their name in QuickBooks Online.

  1. Go to Get paid & pay and select Customers (Take me there).
  2. Select the customer’s name.
  3. At the upper right, select Edit.
  4. In the Display Name as field, enter “Bad Debt” or “No Credit” after the customer name.
  5. Select Save.
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