Cash basis - why do credit memos show up as negative income if the original invoice never showed up in income?

Hello there, mindy14,

I'm here to clear things out for you about writing off bad debt in QuickBooks Online.

Credit memos will show up as negative income if you're using the same item on the invoice. You need to create a bad debt item and use expense account to track uncollectible receivable. This amount will appear on the Profit and Loss report under the Bad Debts expense account.

Hence, there are four steps you need to consider when recording bad debts:

Step 1: Create a bad debts expense account

1. Go to Settings ⚙, select Chart of Accounts.
2. At the upper right, click New to create a new account.
3. From the Account Type ▼ drop-down menu, click Expenses.
4. From the Detail Type ▼ drop-down, select Bad debts.
5. In the Name field, enter “Bad debts.”
6. Click Save and Close.

Step 2: Create a bad debt item

1. Go to Settings ⚙, choose 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 ▼ drop-down, select Bad debts.
5. Click Save and Close.

Step 3: Create a credit memo for the bad debt

1. Click + New.
2. Select Credit memo.
3. Select the customer from the Customer ▼ drop-down.
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. Click Save and Close.

Step 4: Apply the credit memo to the invoice

1. Select + New.
2. Under Customers, select Receive payment.
3. From the Customer ▼ drop-down, select the appropriate customer.
4. From the Outstanding Transactions section, mark the invoice.
5. From the Credits section, mark the credit memo.
6. Click Save and Close.

Once done, you can run an Account QuickReport to check all the receivables you tagged as bad debt. Here's how:

1. Go to Settings ⚙.
2. Select Chart of Accounts.
3. In the Action column of the bad debts account, select Run report.

In case you want to get a QuickBooks-certified bookkeeper, check out the QuickBooks Live Bookkeeping page. They'll help categorize transactions and reconcile your bank statements every month so your books are always 100% accurate.

Should you need anything else, don't hesitate to comment below. I'm always around to help.

Thank you and stay safe!

My problem is the opposite.  I want to write off a customer invoice that we are sending to collections.  I did exactly what you said to do and I when I run the profit and loss report is shows up as income.  We never collected this money so I don't think it should show up as income.  What am I doing wrong

Hi there, @Jennut77.

Thank you for reaching out to us and following the steps provided by my colleague. I can help you more in recording the bad debt.

You have to make sure to select an expense account when creating bad debt. This is for the credit memos not to be under income.

If you've already verified the account type and the P&L report is still showing wrong information, I'd recommend reaching out to your accountant. Since all businesses are unique, they can ensure the correct account is used and to provide additional guidance.

Here's an article you can read for more details: Write off bad debt in QuickBooks Online.

As always, feel free to visit our QuickBooks Community help website if you need tips and related articles in the future.

I'm still here to help you further if you have additional question about bad debt. Just click the "Reply" button or mention my name. I'll wait for your response.

Hi there, did you get this figured out?  We use cash basis and when writing off to bad debt expense, our P&L is showing these as income but we never received which is why we are writing off.  The bad debt expense amount is properly reflected.  What am I missing? 

Thank you!

Hi, DianaDe. Thanks for posting here.

When creating bad debt, make sure to select an expense account so it won't be shown as income in the Profit and Loss report. In your case, since the bad debt expense amount is properly reflected but the P&L is still showing them as income, you can create a Journal Entry to write them off. Before doing so, it would be best to reach out to an accountant. They can guide you on how to record this accurately without messing with your books. 

If you don't have an accountant, we can help you find one through this link: Find a ProAdvisor.

I'm adding this article that details the process on how to record journal entries: Create journal entries in QuickBooks Online.

Don't hesitate to leave a reply if you have other questions in mind. We'd be glad to assist. Take care.

We do have an expense amount created and bad debt is correctly posted to it.  However, I'm thinking that applying the credit memo to unpaid invoices is showing as income to offset the bad debt entry due to report is being run in cash basis and there shouldn't be debt expense reflected as the income was never recorded.  Could that be why? 

Thank you.

@DianaDe 

You are correct.  Cash basis accounting does not use bad debt expense.  That is for accrual basis accounting.  Since you never received payment, there is no income and there should be no offsetting bad debt expense.  Therefore, you should just zero out the invoice.  You can record the amount(s) in the memo field in case your customer is able to pay you in the future.  

Yeah but if you do this and the invoice is in prior periods that are closed, it affects the previous periods.  I dont understand what the debits and credits are on the cash basis report.  There is no credit to A/R because A/R is zero on the cash basis balance sheet but there is a debit to bad debt expense on the cash basis P&L.  So what is being credited on the cash basis?  There is something wrong here.  

Yes, i am having the same issue.  Writing off an invoice with credit on the Accrual is fine but when running the P&L on the Cash basis the bad debt shows up, when it really should not.  It's like QB is making a 1 sided entry to expense on the P&L.  So we are making a phantom expense.  

@jasondhope

"Yeah but if you do this and the invoice is in prior periods that are closed, it affects the previous periods.  I dont understand what the debits and credits are on the cash basis report."

Actually, it won't affect prior periods because nothing has hit your P&L or balance sheet on cash basis as of the invoice date.  Therefore, zeroing out the invoice will not change previously closed periods.  Bad debt expense is not a cash basis thing.  If it's showing up on your cash basis reports, then somewhere you've improperly created a bad debt expense to offset the income that should not have been booked.    

Hi Mindy, I am having the same problem and confused because not accounting expert. We are receiving statements on a cash basis and they are being negatively impacted by the use of credit memos to pay current invoices. This does not involve bad debt. Did you find a way to show the credit memo income somehow on the cash statements. If I go to accrual, it does not fix it, which is odd to me. Thx.