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Level 2

Bad Debt "Write Off" Process Adds To Income

I have some old bad debt I was cleaning up.

 

I followed the recommended process and procedure listed here:

https://quickbooks.intuit.com/community/Help-Articles/How-to-write-off-bad-debt/td-p/187834

 

Problem is that this process add to my income artificially inflating my P&L. This seems wrong.

 

I am running QB Desktop Pro Plus 2019

 

I dug around a little more and found this method of writing off bad debt. Same story, it adds to my income on my P&L for the year. That does not seem right. 

 

 
 
Write off bad debt

There are times when an invoice becomes non-collectible and you need to write it off and declare it as bad debt so you can clear the invoice out of your accounts receivable and reduce your net profit by its amount. This article outlines the steps for writing off bad debt.

 
Before you proceed, check and make sure your A/R Aging Detail report is correct. To check the report, go to Reports > Customers & Receivables > A/R Aging Detail.
  1. Create an account for bad debt.
    1. From the Lists menu, select Chart of Accounts.
    2. In the Chart of Accounts window, right-click anywhere and choose New.
    3. In the Add New Account window, click the Expense radio button then choose Continue.
    4. Assign the appropriate account number and in the Account Name field, type Bad Debt.
    5. Select Save & Close.
  2. Record the bad debt.
    1. From the Customers menu, choose Receive Payments.
    2. Select the name of the customer from whom you incurred the bad debt.
    3. Leave the amount field at 0.00.
    4. Highlight the line item that will not be paid.
    5. Select Discount & Credits Button.
    6. On the Discount tab, enter the bad debt amount in the Amount of Discountfield.
    7. In the Discount Account drop-down, choose the bad debt expense account created in Step 1, then click Done.
    8. Select Save & Close to record the payment.
5 Comments
Highlighted
Level 7

Bad Debt "Write Off" Process Adds To Income

The procedure for writing off bad debt is correct.  You are running your profit & loss statement on a CASH BASIS.  Your income will increase by the amount of the bad debt written off, but you will also have and expense (Bad Debt Expense) in the same amount, so they cancel each other out and net income remains unpaid.

 

When running a CASH BASIS profit and loss statement, income is not recognized until received.  When writing off bad debt in the manner described, you are literally recognizing the income and off-setting with an equal expense. 

 

If you do not want your income overstated, I suggest you issue a credit memo in the amount of the bad debt using income items on the credit memo.  Then apply the credit memo against the invoice.  This will reflect your true cash basis income without the off-setting bad debt expense.

 

Highlighted
Level 2

Bad Debt "Write Off" Process Adds To Income

I thank you for your reply  QBsguru!

 

My bad debt is all aged 1 year or more. I am looking for a method that will not inaccurately skew my annual income numbers. I am using a cash basis. 

 

When I attempted the Credit Memo procedure for writing off the bad debt, that posted as income for the current year as well. Is this the correct application? I used this process:

 

Step 4: Create a credit memo for the debt

To create a credit memo:

  1. Select the Plus icon (+) on the Toolbar.

  2. Select the customer from the Customer drop-down list.

  3. In the Product/Service field, select the Bad Debt item you created.Enter the Amount of the unpaid invoices as a positive number.In the Memo field, enter Bad Debt.

    Select Save and close.

    1. Select the Plus icon (+) on the Toolbar.

    2. Under Customers, choose Receive Payment.

    3. Select the customer from the Customer drop-down list.

    4. In the Outstanding Transactions section, select the invoices to write off.
    5. Under Credits, select the credit memo you created.
    6. Make sure the Amount received is 0.00.
    7. Select Save and close.

  4. Step 5: Apply the credit memo

    To use the credit memo to write off the bad debt:

    1. Select the Plus icon (+) on the Toolbar.

    2. Under Customers, choose Receive Payment.

    3. Select the customer from the Customer drop-down list.

    4. In the Outstanding Transactions section, select the invoices to write off.
    5. Under Credits, select the credit memo you created.
    6. Make sure the Amount received is 0.00.
    7. Select Save and close.

Highlighted
Level 2

Bad Debt "Write Off" Process Adds To Income

This was so incredibly simple! So much so, that it makes feel as if I did it incorrectly. Would this process be the same for Accrual Basis? 

Highlighted
QuickBooks Team

Bad Debt "Write Off" Process Adds To Income

Glad to have you here, @stressedbyQ-B.

 

I'm here to share some information about the impact of your accounting preferences with writing bad debts.

 

With QuickBooks, you have the option to toggle your accounting preferences between accrual and cash basis. This feature greatly impacts the data included when generating reports in your account. Thus, you'll still use the same process in writing off bad debt.

 

Feel free to click the Reply button if you have other questions about writing off bad debt in QuickBooks Desktop. I'm always here to help.

Highlighted
Level 7

Bad Debt "Write Off" Process Adds To Income

If this worked for you, please mark it as solved.  Glad I could help.

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