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Write off bad debt in QuickBooks Online

by Intuit•46• Updated 2 days ago

Bad debt means a customer owes you money but you can't collect it. They have a debt with you, but you know you aren't going to get paid. If your business uses accrual method accounting, you can sometimes write off bad debt as a deduction.

When invoices you send in QuickBooks become uncollectible, you need to record them as bad debt and write them off. This ensures your accounts receivable and net income stay up-to-date. 

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 âš™ and select Chart of accounts (Take me there).
  2. Select New.
  3. From the Account type â–Ľ dropdown, select Expenses.
  4. From the Detail type â–Ľ dropdown, select Bad debts.
  5. In the Account name field, enter Bad debts.
  6. Select Save.

2. Create a bad debt item

  1. Go to Settings Settings gear icon. and select Products and services (Take me there).
  2. Select New, and then select Non-inventory item.
  3. In the Name field, enter Bad debts.
  4. Tick the I sell this to my customers box.
  5. From the Income account â–Ľ dropdown, select Bad debts.
  6. Select Save and close.

3. Create an adjustment note for the bad debt

  1. Select + New or + Create.
  2. Select Adjustment Note.
  3. Select the customer from the Customer ▼ dropdown.
  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.

4. Apply the adjustment note to the invoice

  1. Select + New or + Create.
  2. Under Customers, select Receive payment.
  3. From the Customer â–Ľ 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 âš™ and select Chart of accounts (Take me there).
  2. Select New.
  3. From the Account type â–Ľ dropdown, select Expenses.
  4. From the Detail type â–Ľ dropdown, select Bad debts.
  5. In the Account name field, enter Bad debts or Uncollectible debts.
  6. Select Save.

2. Create an allowance for the bad debt account

  1. Go to Settings âš™ and select Chart of accounts.
  2. Select New.
  3. From the Account type â–Ľ dropdown, select Current assets.
  4. From the Detail type â–Ľ dropdown, select Allowance for bad debts.
  5. In the Account name field, enter Allowance for bad debts.
  6. Select Save.

3. Create a bad debt item

  1. Go to Settings âš™ and select Products and services.
  2. Select New, and then Non-inventory item.
  3. In the Name field, enter Bad debts.
  4. From the Income account â–Ľ dropdown, select Allowance for bad debts.
  5. Tick the I sell this to my customers box.
  6. Select Save and close.

4. Create an adjustment note for your invoice

  1. Select + New or + Create.
  2. Select Adjustment Note.
  3. Select the customer from the Customer ▼ dropdown.
  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 or + Create.
  2. Select Receive payment.
  3. Select the customer from the Customer ▼ dropdown.
  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 or + Create.
  2. Under Other, select Journal entry.
  3. Enter the correct Journal date.
  4. In the first line, select or enter the following:
    • Account â–Ľ 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 â–Ľ 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 or Save and close.

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

  1. Estimate your yearly bad debt expense, then divide it by 12.
  2. Go to Settings ⚙ and select Recurring transactions.
  3. Select New.
  4. From the Transaction Type ▼ dropdown, select Journal Entry and then select OK. 
  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 â–Ľ dropdown: Bad debts.
    • Debit: monthly estimated bad debt amount.
    • Description: enter "Estimated bad debt."
    • Name: customer name.
  7. In the second line, select or enter the following:
    • Account â–Ľ 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. Follow this link to complete the steps in product Open this link in a new window
  2. Select the customer’s name.
  3. Find and open the adjustment note you want to undo.
  4. Select the dropdown arrow next to Action column, and then select Void.
  5. Confirm you want to void the adjustment note by selecting Void sales credit.
  6. Follow this link to complete the steps in product Open this link in a new window
  7. Find and open the journal entry you want to undo. Select View/Edit.
  8. At the bottom, select More, and then Delete.
  9. Select Delete transaction.

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. Follow this link to complete the steps in product Open this link in a new window
  2. Find and open the uncollectible invoice.
  3. Under the GST column, change all the GST rate to Out of Scope (0%).
  4. At the bottom, select More actions, then Void.
  5. Confirm you want to void the invoice and select Void Invoice.
  6. Reopen the invoice.
  7. In the Memo on statement (hidden) box, enter Bad debt after Voided.
  8. Select Save or Save and close.
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. Follow this link to complete the steps in product Open this link in a new window
  2. Find and select the uncollectible invoice.
  3. Under the GST column, change the GST 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 Memo on statement (hidden) box, enter Bad Debt.
  7. Select Save or Save and close.

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.

Follow this link to complete the steps in product Open this link in a new window

  1. Select the customer’s name.
  2. Select Edit.
  3. In the Customer display name field, enter Bad Debt or No Credit after the customer name.
  4. Select Save.

Result

The uncollectible receivable now appears on your Profit and Loss report under the Bad Debts expense account.

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