How do you get the Allowance for Bad Debts to "Net" against the Accounts Receivable account on the Balance Sheet? Sub-account doesn't work, must be same acct type.

I'm here to help on how to create bad debts, carlwcpa.

We need to create first an account for bad debts. 

1. Go to the Chart of Accounts and select New.
2. Choose Expenses for the Account Type, and Bad Debts for the Detail Type.
3. You can enter Bad Debt on the name field. Then, click Save and close.

Then, let's create a product/service for the bad debt.

1. Select New on the Products and Services page.
2. Choose Non-inventory. You can enter Bad Debt on the name field.
3. Select the Bad Debt expense you created for the Income account.
4. Clear the Is taxable checkbox. Then, click Save and close.

Next, we need to create a credit memo.

1. Go to the Plus icon and select Credit Memo.
2. Choose the customer from the Customer drop-down.
3. Select the Bad Debt item you created in the Product/Service field.
4. In the Memo field, enter Bad Debt. Then, click Save and close.

We'll need to apply the credit memo after creating it. Though, the credit memo will apply automatically if the setting to automatically apply credits is turned on. To use the credit memo to write off the bad debt:

1. Go to the Plus icon and select Receive Payment.
2. Choose the customer. On the Outstanding Transactions section, select the invoice to write off.
3. Select the credit memo you created under Credits.
4. Click Save and close.

Once done, you can run a report for bad debts. You can check How to write off bad debt article as your reference.

Please let me know if you have other concerns. Have a great one!

That’s all fine if you are using the “Direct Method of Write Offs”.  But in the real world larger accrual clients use the “Allowance Method”.  In that method - each month (matching principal) you EXPENSE a percentage of the sales.  The offset is a credit to the “Allowance for Bad Debts” account (a contra current asset account).  

Periodically you remove receivables by crediting the A/R account and debiting the Allowance account, not the expense account.   I did set up a “sales / product code” for the client to use - for this step.  

The snag is when “Allowance for Bad Debts” is set up as an Accounts Receivable type - you have to have a customer name to post that estimate.  You can make up a customer to “hold” the balance - but now when the bank wants to review your A/R detail list for your Line of Credit analyses... trouble for the client. 

However, there is a current asset ‘account type’ called “Allowance for Bad Debts” and NO customer detail is required for it.  **** The only thing missing is, it would be nice if QBO could allow it to be a sub-account to the Accounts Receivable ‘account type’.  Then on the Balance Sheet they could be combined - i.e. netted together:

Cash                                   $1,000,000

Accounts Receivable            500,000

Allowance for Bad Debts      (80,000)

                                                 ———————

Net                                            420,000

                                                 ———————

(or even —-  Accounts Receivable, net of allowance 420,000)

Land                                             5,000

Buildings                                 885,000

etc.  etc. 

See attached 

For now - on the Balance Sheet - I figured out a work around.  Just a pain in the 

That’s all fine if you are using the “Direct Method of Write Offs”.  But in the real world larger accrual clients use the “Allowance Method”.  In that method - each month (matching principal) you EXPENSE a percentage of the sales.  The offset is a credit to the “Allowance for Bad Debts” account (a contra current asset account).  

Periodically you remove receivables by crediting the A/R account and debiting the Allowance account, not the expense account.   I did set up a “sales / product code” for the client to use - for this step.  

The snag is when “Allowance for Bad Debts” is set up as an Accounts Receivable type - you have to have a customer name to post that estimate.  You can make up a customer to “hold” the balance - but now when the bank wants to review your A/R detail list for your Line of Credit analyses... trouble for the client. 

However, there is a current asset ‘account type’ called “Allowance for Bad Debts” and NO customer detail is required for it.  **** The only thing missing is, it would be nice if QBO could allow it to be a sub-account to the Accounts Receivable ‘account type’.  Then on the Balance Sheet they could be combined - i.e. netted together:

Cash                                   $1,000,000

Accounts Receivable            500,000

Allowance for Bad Debts      (80,000)

                                                 ———————

Net                                            420,000

                                                 ———————

(or even —-  Accounts Receivable, net of allowance 420,000)

Land                                             5,000

Buildings                                 885,000

etc.  etc. 

See attached 

For now - on the Balance Sheet - I figured out a work around.  Just a pain in the 

---

@carlwcpa wrote:

That’s all fine if you are using the “Direct Method of Write Offs”.  

---

The robot was not programmed to comprehend "Allowance for Bad Debts", just saw "Bad Debts" and off it went spewing baloney

Hello - I am having the same issue.  Am guessing that your work around is to have the Allowance for Doubtful Accounts as a current asset but outside of  Accounts Receivable.  Please confirm as that is the only way that I can see this working, very frustrating.  

Is the workaround to move the Allowance for Doubtful Accounts outside of A/R within the Chart of Accounts? 

That's the only way I can see it working. 

I have pretty much the same question.  In our QBO, the Allowance for Bad Debt contra-asset account has been designated an "Accounts Receivable" account type which requires a customer to be named when creating an adjustment to this account. I don't want to name a customer.  I just want to adjust the account balance.  Therefore I would like to change the type of the Allowance account from 'Accounts Receivable' to 'Other Current Liability'. I can live with the fact that it doesn't roll up into Accounts Receivable on the balance sheet.  Any reason not to do that?

Thanks a lot in advance. 

Having same problem. Only workaround I see is same as above to have the Allowance be a different account type and not a sub account of the A/R to avoid having the fictitious customer assigned

Did anyone find a solution for this aside from reclassifying the Allowance account as other Current asset?

If not, after I reclassify and make the beginning entries to record the allowance, how do I set the bad debts to go straight into that account instead of the expense account? Thanks.

Thanks for checking in with us, Derrick124. 

I know how beneficial it is to your business to set the bad debts to go straight into that account instead of the expense account. However, this option is unavailable in QuickBooks Online (QBO). We write off the bad debt by creating first an Expense account for Bad Debts.

In this case, you'll want to consult your accountant on how to reclassify the Allowance account and put the bad debts to go straight into that account. You can visit these blogs for any upcoming QuickBooks updates and enhancements:

• QuickBooks Resource Center
• The QuickBooks Blog

Visit our Expenses and vendors page for more insights about managing your expenses and vendor transactions.

The Community will always have your back if you need a hand with running your financial reports or any QBO related. Assistance is just one post away. Take care always. 

Thank you for the feedback. I don't have QBO I have Quickbooks desktop, is it the same for that as well?

Thank you.

Hey there, Derrick124. 

Thanks for dropping by this afternoon. You're correct, unfortunately this is also the same with QuickBooks Desktop. Therefor, your best bet would be to consult with an accountant. If you don't have an accountant at this time, you can check out our "Find an accountant tool, type in your location and it will populate with local accountants who are also QuickBooks experts. 

• Find an accountant. 

Thank you so much for your time and I hope you have a lovely afternoon.