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Write off bad debt

Forum|Forum|6 years ago
April 10, 2020
4 replies
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We created an account called "allowance" which is our allowance for doubtful accounts aka bad debt.

I need to write off the balance of an invoice to bad debt but am unsure how to do this.

I can go to refunds & credits and do a customer write off and apply it to the invoice but this reflects on the income state and only erases the balance from the customer account without doing anything to the allowance account created.

In other words i have no idea how to write off bad debt properly.

Please Help

QuickBooks Desktop

Best answer by DMKmb

An Accounts Receivable allowance account (Allowance for Doubtful Accounts) is a contra account to your main Accounts Receivable account. It works similar to an accumulated depreciation account for fixed assets.

Usually on an annual basis you estimate an amount of receivables that you would not collect as to try to match revenues and expenses reported for the current year end. So if you had $1,000,000 in receivables and you estimate that 2% will not be collectable; then you would debit your Bad Debts Expense Profit and Loss Statement account for $20,000 and Credit the Allowance account for the same amount.

When you go to write off a specific invoice receivable using the Refunds & Credits option the amount is properly entered to expense as it should (system defaults), but you will have to do a manual journal entry to adjust the allowance account balance for the specific amount of the write-off (Debit Allowance Account and Credit the Expense account).

Alternatively:

You can do a manual journal entry Credit- Accounts Receivable and Debit- Allowance account. Just be certain to enter the correct customer name in the journal entry fields and then clear the entry to the outstanding amount.

R

ReymondO

Moderator

I'll help you in writing off the balances of your invoices in QuickBooks, @Constdan91.

When creating a bad debt, let's make sure that we track this to an expense account. This way we can offset your accounts receivable on the Balance Sheet.

Here's how you to add an expense account to track the bad debt

Go to the Lists menu and select Chart of Accounts.
Click the Account menu, then select New.
Click Expense, then Continue.
Enter an Account Name, for example, Bad Debt.
Click Save and Close.

Once done, let's delete the payment that you've created to write off the invoice. This way, we can start over to close out the unpaid invoice.

Open the invoice and click the Payment link in the right-hand corner.
Click Delete.
Once a prompt pops out, click OK.

After deleting the payment, we can now write it off again. Let me show you how:

Go to the Customers menu and select Receive Payments.
Enter the name of the customer in the Received from field.
For Payment amount, enter $0.00.
Click Discounts and credits.
In the Amount of Discount field, enter the amount you'd like to write off.
For Discount Account, select the bad debt account, and select Done.
Click Save and Close.

In addition, you can check your customers' open balances by running the Accounts Receivable Aging Detail report. Just follow these steps:

Go to the Reports menu and select Customers & Receivables.
Click A/R Aging Detail.

You can also customize this report to easily review the information that matters to your business the most.

If you have further questions or concerns, feel free to reach back out anytime. Stay healthy and keep safe.

For more information on taxes, forms, filings, payroll and other Year End activities, make sure to check out our Year End Resources page.

C

Constdan91Author

My manager says he wants to ensure that when we write it off that is does not affect the income statement because they already created a allowance for bad debt that hit the income statement.

Does your solution of creating the bad debt chart of accounts avoid having the write off hit the income statement?

Sorry i am very new to Quickbooks

Thanks

Pabz_L

Hello, @Constdan91.

I know how it is important to record correctly all of your transactions in QuickBooks. When invoices you send in QuickBooks Desktop become uncollectible, you need to record them as a bad debt and write them off.

Since you already created an account called "allowance" there is no need to create an expense account to track your bad debt.

You can follow the steps above provided by my colleague except for the first steps. That ensures your accounts receivable and net income stay up to date.

You can refer to this article for additional information. Write off bad debt in QuickBooks Desktop.

Please let me know if you have other questions. Take care!

D

DMKmbAnswer

An Accounts Receivable allowance account (Allowance for Doubtful Accounts) is a contra account to your main Accounts Receivable account. It works similar to an accumulated depreciation account for fixed assets.

Usually on an annual basis you estimate an amount of receivables that you would not collect as to try to match revenues and expenses reported for the current year end. So if you had $1,000,000 in receivables and you estimate that 2% will not be collectable; then you would debit your Bad Debts Expense Profit and Loss Statement account for $20,000 and Credit the Allowance account for the same amount.

When you go to write off a specific invoice receivable using the Refunds & Credits option the amount is properly entered to expense as it should (system defaults), but you will have to do a manual journal entry to adjust the allowance account balance for the specific amount of the write-off (Debit Allowance Account and Credit the Expense account).

Alternatively:

You can do a manual journal entry Credit- Accounts Receivable and Debit- Allowance account. Just be certain to enter the correct customer name in the journal entry fields and then clear the entry to the outstanding amount.

R

Rasa-LilaM

QuickBooks Team

Thanks for joining on this thread, @JenniMJ.

When writing off bad debt, the amount entered in the Amount discount field should be the same one displayed in the Amount Due section. This is to clear out the transaction and keep you from receiving the error message.

To continue with the process, I still suggest following the instructions provided by @ReymondO.

For tips and other resources on how to keep track of transactions and finances using QuickBooks, check out our self-help articles: Get started.

Stay in touch if you have any clarifications or questions. I’ll be right here to answer them for you. Have a good one.

D

dso0216

I'm doing a review of the financials for a company that established their allowance account in 2018. At the time they had a large amount of receivables past due over 60 days so the allowance was established making the entry below ($ for example purposes only):

Bad Debt $40k

Allowance $40k

The collected almost all of the outstanding invoices during 2019. Based on a review of the aging schedule according to the company's policy the allowance account should be ~$10k. If I make an entry to adjust the allowance account in 2019 I will have bad debt that is negative -$30k which is unacceptable for GAAP statements. If I use the Receivables account (which seems the logical way) then I would make the entry below:

Allowance $30k

AR $30k

Since QB requires a customer associated with JE's involving AR should I set-up an allowance customer? Or will that screw up the AR balance?

Any advice or suggestions are welcome

D

DMKmb

Hello;

Assuming that the original AR amounts for the customers were not written off from AR and that amounts received were entered as collections on amounts receivable. Then all you are adjusting is the Allowance and the Bad debt expense amounts not touching the main AR account(s). Having a negative expense isn't so much against GAAP, its more that it just doesn't look nice.

In this case instead of having the allowance account adjustment be recorded against Bad Debt Expense, just record it to the most applicable Other Income account you have.

DR Allowance account $30k

CR Other Income $30k

Generally speaking, everyone expects expenses to have debit balances and positive amounts. Though sometimes for internal reporting it makes more sense to leave it as a negative expense as to readily see and understand changes between reporting periods, and then cleaning things separately (in excel or by external year end accountants) up for external financial reporting.

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