How to Write off Bad Debt in QuickBooks Online & Desktop?

Bad Debt is a commonly known financial obstacle, often experienced by businesses of all sizes and domains. Usually, bad debt […]

Bad Debt is a commonly known financial obstacle, often experienced by businesses of all sizes and domains. Usually, bad debt arises when any receivable amount, generally from a client or customer cannot be collected. This particular scenario arises when the debtor fails to meet the payment requirements because of a financial crisis or any other problem.

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Hence, handling bad debts is an important part of financial administration for businesses. This is why, tools such as QuickBooks Desktop and QuickBooks Online are of great help and are used in such cases.

Not to mention, QuickBooks makes sure that the financial records stay precise and show the real financial position of the company. In today’s article, we will talk about the steps of how QuickBooks Desktop and QuickBooks Online can be used to handle and write off bad debts, making sure your business follows healthy financial approaches and precise accounting records.

What is the Meaning of the Term Bad Debt?

In the world of accounting, bad debt is a type of loss that is experienced by a business when it becomes obvious that the receivable from a particular customer cannot be acquired. Such receivables can be in the form of loan payments or outstanding invoices which are due to the business.

Bad Debt is classified under the accrual accounting method where revenues are registered during the time of the sale, instead of when the cash is acquired. Hence, when it is clear that the revenues will not be acquired, they will be termed as bad debts.

Meaning of Write off Bad Debts for an Organization

When the amount which was in the rewarding structure and should be gotten from the customer fails to recover in any organization, then it is named Bad Debt. Those organizations that are already using QuickBooks Desktop, bad debts can be understood as invoices that become uncollectible throughout time.

Writing off bad debts can make it clearer for an organization to track its average net turnaround and profit. Without the help of any accounting software if the records are managed and handled manually then the same can become quite boring.

How Bad Debts Impact the Financial Statements?

The occurrence of bad debts has an important and direct influence on the financial statements of a company:

  • Balance Sheet: On your balance sheet, bad debts give rise to a reduction in the balance of Accounts Receivable. This is because they represent amounts which are not estimated to be collected. As a result, it impacts the total asset value of your organization.
  • Income Statement: Bad Debts are registered as an expense. As a result, it cuts down the net earnings of the business. This is due to the fact that the expected revenue from the services provided or sales will not be provided.
  • Cash Flow Statement: When bad debts do not impact the cash flow directly, it affects the total financial health displayed by the Cash Flow Statement, highlighting the efficiency of the company in handling and collecting the receivables.

How to Write off Bad Debt in QuickBooks Desktop?

In QuickBooks Desktop (QBD), writing off bad debt is a process that keeps your net income and accounts receivable data accurate. Please find below a thorough description of how bad debt is written off in QBD:

Create an Expense Account for the Purpose of Tracking Bad Debt

  • Go to the Chart of Accounts: Begin by navigating to the Lists menu in QuickBooks Desktop. Next, select “Chart of Accounts”.
  • Make a New Account: In the Chart of Accounts, go to the ‘Account’ menu and choose ‘New’
  • Set up the Account: Choose Expense as the particular account type and press Continue
  • Account Name: Add a label to this new expense account
  • Save the Account: Finish the step by choosing Save and Close. With the help of this account, monitoring bad debt losses becomes easy

Settling the Uncollectible Invoices

  • Use Receive Payments: Navigate to the Customers menu and select Receive Payments. Here you can manage the procedure of closing out the unpaid invoice. This is where you will manage the process of closing out the unpaid invoice.
  • Choose Customer: In the field, Received from, type the name of the customer with whom the uncollectible invoice is available.
  • Enter Payment Amount: Fix the Payment amount to USD0.00, since you are not receiving any payment.
  • Implement Credits and Discounts: Choose Discounts and credits. Here you need to write off the unpaid amount.
  • Write off the Amount: In the field for Amount of Discount, enter the amount you wish to write off. This amount is uncollectible.
  • Choose the Bad Debt Account: For the Discount Account, select the bad debt expense account you prepared in the first step. This connects the write-off to the right account.
  • Finalize the Transaction: Press Done and then click Save and Close. This will help to write off the unpaid invoice amount and then register it as bad debt.

Note: The Accounts Receivable Aging Detail report is a useful tool for keeping track of the open balances of your clients. This might assist you in determining which invoices have the potential to turn into bad debts.

How to Write off Bad Debt in QuickBooks Online?

Here is a simple guide to assist you in easily managing the uncollectible receivables and then write off bad debts in QuickBooks Online:

Reviewing Aging Receivables

Accounts Receivable Aging Report
Accounts Receivable Aging Report
  • Going to Reports- Start in QuickBooks by going to the Reports area
  • Use the Receivables Report- Look for and open the particular Accounts Receivable Aging Detail Report. This report is important for evaluating the outstanding receivables.
  • Classifying non-collectibles receivables- Examine the report to understand which receivables have less chance to be collected or must be classified as bad debt.

Creating a Bad Debts Expense Account

Bad Debt Account
Bad Debt Account in QuickBooks
  • Using the Chart of Accounts: Navigate to Settings and choose the option, Chart of Accounts
  • Preparing an Account: Look for the New option at the top-right side to make a new account
  • Select Account Specifications: In the account type section, choose Expenses. Now for detail type, select Bad Debts
  • Account naming: The new account must be labeled as Bad Debts
  • Saving the account: Lastly, save your changes by pressing the Save and Close option

Creating a Bad Debt Item

  • Products and Services Section: In the Settings section, go to the tab, Products and Services.
  • Make a Placeholder Item: Press New and then select the option, Non-inventory. This particular step is used to prepare an item to show the bad debt in your particular accounts.
  • Name the Item: Label this particular non-inventory item as Bad Debts.
  • Linking to the Bad Debts Account: Link this item to the initially established Bad Debts account through the Income Account drop-down.
  • Selecting the Setup: Finish this step by choosing Save and Close.

Making a Credit Memo for Bad Debt

Credit Memo for the Bad Debt
Credit Memo for the Bad Debt
  • Beginning the Memo: Select + New and then choose Credit Memo to start the process
  • Customer Selection: From the dropdown list for Customer, select the customer connected to the bad debt
  • Entering in the Credit Memo: In the area for Product/Service, choose Bad Debts and enter the amount that you want to write off. Add a note mentioning Bad Debt in particular the statement message box
  • Finishing the Memo: Finish this step by pressing Save and Close

Applying the Credit Memo

  • Begin Payment Reception: Choose + New and go to the Receive Payment option in the Customers section.
  • Customer Selection: Select the applicable customer from the particular dropdown menu.
  • Invoice Adjustment: In the area for Outstanding Transactions, mark the particular invoice you wish to write off. Now, in the Credits section, include the initially created credit memo.
  • Finalizing the Application: Finish by pressing Save and Close which will show the bad debt in the Profit and Loss report in Bad Debts.

Creating a Bad Debt Report

  • Go back to the Chart of Accounts: Navigate back to Settings and choose Chart of Accounts.
  • Generation of Report: In the account row for bad debts, press Run report to check all the tagged receivables as bad debt.

Additional Suggestions

You can assign entities with bad debts in the Customers column under Sales. Add a notation like Bad Debt or No Credit to their names. Consider hiring a QuickBooks Online and Desktop certified bookkeeper to regularly classify transactions and reconcile bank statements in order to maintain accuracy.

It’s crucial to write off bad debt in QuickBooks Desktop and Online in order to keep your financial records trustworthy. It guarantees that your net income and accounts receivable accurately represent the state of your company’s finances. Although the procedure is slightly different in each version of QuickBooks, it nevertheless accomplishes the same vital function.

Being aware of potential bad debts and keeping an eye out for them can help with early intervention and possibly keep certain debts from going uncollectible.

In the end, QuickBooks effective bad debt write-off feature guarantees that companies may keep their attention on expansion and success, being safely assured that their accounting records faithfully depict their financial situation.

Accounting Professionals, CPA, Enterprises, Owners
Accounting Professionals

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+1-800-596-0806 or chat with experts.

Frequently Asked Questions (Faqs)

Is it possible to recover bad debts once they have been written off in QuickBooks?

Once a client makes a payment after their debt has been written off, you can enter that payment into QuickBooks. Reversing the write-off and recording the income normally would be the steps to do it.

Is it important to talk to a professional prior to writing a bad debt off?

Even while QuickBooks makes writing off bad debt very simple, it’s still a good idea to speak with an accounting expert, especially when dealing with large sums. This guarantees that all tax and accounting complications are appropriately handled.

How does writing off bad debt impact business taxes?

Tax complications may arise when bad debt is written off. Bad debts can usually be written off, which lowers your taxable income. However, since tax regulations differ, it’s crucial to get particular suggestions from a tax expert.

How frequently should I review Accounts Receivable for possible bad debts?

It is advised to review your accounts receivable in QuickBooks at least once a month in order to spot possible bad debts early. This facilitates prompt action to write off or collect the debt.

Is it possible to prevent bad debts in business?

Even while it’s impossible to totally avoid bad debts, you may lower your risk by checking the credit of potential clients, establishing clear payment terms, and timely reminding them when they have payments due.

Do QuickBooks offer tools to assist with bad debt management?

Yes. QuickBooks offers several reports and tools like the Accounts Receivable Aging Detail Report. It can assist in locating the handling bad debts with ease.

Can you View all the Bad Debt once you are done Setting up a Bad Debt Account in QuickBooks?

Yes. Once you have completed setting up a bad debt account in QuickBooks, you can smoothly run the report and view unpaid invoices along with the bad debts.

Can You Write off Bad Debt as a Deduction in Business?

Yes. If your particular business puts to use an accrual method of accounting, it is possible to write off bad debt as a certain form of deduction.

How to Record a Bad Debt Written off?

To record bad debt entry you have to:

  • Debit your Bad Debts Expense account and credit your Accounts receivable account.
  • Record the bad debt recover transaction.
  • Debit your Accounts Receivable account and credit your Bad Debts Expense account.

How to Write off Overpayments on QuickBooks Desktop?

  • From the customer’s menu you have to choose create Invoices.
  • Then click the customer name in the Customer.
  • After that, select minor charge-off in the field of Item and then enter the amount of overpayment.
  • At last, hit on Apply Credits.

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