How do I setup allowance for doubtful accounts?

ashley13 · ‎March 11, 2019

I already have a Bad Debt setup in Chart of Accounts and within Items but from there where do I go?

Do I simply create a credit memo for the customer and then only apply it if they do indeed pay us?

Thanks

impossible · ‎March 11, 2019

What I have done for several clients is: create an A/R type account (sub-account of A/R) in the COA called A/R Doubtful. When a receivable is getting old, I open the invoice and select the A/R Doubtful account instead of the A/R. This effectively moves the transaction out of the main A/R and is easily identifiable. At yearend, if you are 100% certain that payment is not forthcoming, create the credit memo using the Bad Debt item and notify your Accountant that everything in the Bad Debt Account is to be written off.

View solution in original post

impossible · ‎March 11, 2019

What I have done for several clients is: create an A/R type account (sub-account of A/R) in the COA called A/R Doubtful. When a receivable is getting old, I open the invoice and select the A/R Doubtful account instead of the A/R. This effectively moves the transaction out of the main A/R and is easily identifiable. At yearend, if you are 100% certain that payment is not forthcoming, create the credit memo using the Bad Debt item and notify your Accountant that everything in the Bad Debt Account is to be written off.

Anonymous · ‎March 11, 2019

Thats a nice way to separate the problem accounts! of course you still also l have to create the ADR contra-asset account and fill it.

ashley13 · ‎March 11, 2019

Thanks - this seems like a clean and easy way to do it. What is the ADR contra-asset account?

Malcolm Ziman · ‎March 11, 2019

Allowance for doubtful accounts, is not customer specific. It's a reduction of the receivable asset, posted at year-end, an estimate based on historical data, - so you may create an allowance for say 5% of your total receivables at year-end, because that is the historical statistic for the business. The entry is dr. Bad Debt expense, cr Allowance (current asset). Then when a specific customer's debt is written off, instead of it going to Bad Debt expense, it goes to the Allowance. If you don't use an allowance you only write off a customer's debt when you are fairly certain that it is bad. You can do that by creating a Credit Memo (using an item linked to Bad Debt expense) or a Journal Entry if there is no sales tax: dr. Bad Debt expense, cr AR/customer

Anonymous · ‎March 11, 2019

Generally correct but

Ashley is likely in Canada, and the CRA tax rule/policy is that the "Allowance for Doubtful Receivables" must be based on specifically identified customers & invoices - not just a general overall percentage of AR. You can still apply percentages to those specific customer & bills based on your estimated likelihood of collection. I just export an AR aging to spreadsheet and then run down the overdue columns and add a factor column for estimated loss ratio with the extended total. Basically you have to show that you have tried to make a reasonable assessment based on actual account conditions.

I do use use 'general % allowance' as a way to create a monthly expense to add to ADR.

You only have to make the detailed analysis and list at the year-end to backup the amount on the balance sheet at that time.

Malcolm Ziman · ‎March 11, 2019

""Allowance for Doubtful Receivables" must be based on specifically identified customers & invoices"
whether it's an allowance or not, an expense is created, which reduces your taxable income- so why would the tax people be concerned with where the credit goes - direct to AR or to an allowance?

Anonymous · ‎March 11, 2019

I assume the rule is there to prevent cos from 'padding' their bad debt expense by creating unreasonably big allowances.

Malcolm Ziman · ‎March 11, 2019

so if it is based on specific invoices, why the allowance? Just send the credit directly to the customer

dgc1 · ‎September 12, 2019

I am using products/services and when I open an invoice there is nowhere for me to change the A/R account to A/R doubtbful. What am I missing. thx

dgc1 · ‎September 12, 2019

@impossible I am using products/services and when I open an invoice there is nowhere for me to change the A/R account to A/R doubtbful. What am I missing. thx

impossible · ‎September 12, 2019

A/R Doubtful is not an account created automatically by QB. You must create it yourself. Once done, open the unpaid invoice and select the A/R Doubtful account from the dropdown list.

dgc1 · ‎September 12, 2019

Thank you for your reply. yes I have created the A/R Doubtful account as a sub account of Accounts receivable. When I open the invoice I'm not seeing where I can change the A/R account. Note that I am in QBO and your screenshot looked like QB desktop. Please confirm thank you @impossible

Anonymous · ‎September 12, 2019

Thanks for getting back, @dgc1.

Allow me to help add some information about the A/R account in QBO.

In QuickBooks Desktop, you can change the A/R account as suggested by our Community Backer. This is not possible if you're using QBO.

You can create multiple A/R accounts, however, it's not designed to work with them. The initial A/R account created will be its default in tracking A/R balances. For this reason, we can't change the default A/R account assigned by QuickBooks.

I can see how this option would be helpful for you and your business. I'll be sure to pass this along and let our developers know about this.

In the meantime, you can check out our QuickBooks Online Blog for news and updates about QBO.

Keep me posted if you have additional questions about your accounts in QBO. I'll be here if you need help.

dgc1 · ‎September 12, 2019

Thank you @Anonymous for clearing that up for me. Hoping that this feature will also be available in a future release of QBO

dgc1 · ‎September 12, 2019

@Anonymous As a work around would it be possible to use the Write Off Invoices function in the Accounts Toolbox in a similar fashion to move invoices that are potentially uncollectible?

Instead of using Bad Debt Expense for the write off account could an asset account be used? Again, I don't know what all of the debits and credits for this function are so I would appreciate some information on that

Anonymous · ‎September 12, 2019

You're certainly welcome, @dgc1.

Our Product Team is constantly working to improve the features in QBO and appreciates your help in bringing things like this to their attention.

Your workaround for this is absolutely possible. Replacing the bad debt expense to an asset can be done by editing the income account field of the Bad Debt Item. You may refer to the screenshot below.

However, this will result in a positive income in the Profit & Loss. Unlike the bad debt, the invoice will increase the income and the bad debt is matched to zero this income.

If you need related articles for this, you may check out the following links below.

Using the Write Off Invoices tool

Write off bad debt

Let me know your thoughts about this process. I'll be around if you have additional questions about using the Bad Debt item.

dso0216 · ‎May 30, 2021

The allowance for doubtful accounts is for GAAP financials, the purpose is the matching principle, to determine the true profiability of sales. In QB the entry appears to be a "work around" as the A/R accounts must be a specfic customer. The AR allowance account is basically a reserve or estimate.

Topics

Training

Community

Resources

How do I setup allowance for doubtful accounts?