How to Record a Bad Debt in QuickBooks Desktop and Online?

Recording bad debt in QuickBooks Desktop and Online is a necessary process to ensure a company’s financial statements accurately reflect true profitability and collectible receivables. This practice is mandatory when using the accrual accounting system, which reports revenue upon sale rather than cash receipt. The core methodology involves using a Credit Memo or Discount feature to zero out the uncollectible invoice balance and debiting the amount to a Bad Debt Expense account, typically categorized under Selling, General, and Administrative Expenses (SG&A). Avoiding the common mistake of simply deleting an invoice is critical, as deletion corrupts the audit trail and can lead to sales tax overpayments. Furthermore, effective debt management extends beyond write-offs to include proactive measures like frequent review of the Accounts Receivable Aging Detail Report (recommended monthly or bi-weekly), establishing clear debt policies, and understanding the distinct difference between a bad debt expense and an early payment discount. Businesses must also be aware that tax deductions for bad debt are generally not available under the cash accounting method, necessitating consultation with a tax professional to ensure compliance.

Highlights (Key Facts & Solutions)

• Accurate Write-Off is Mandatory for Accrual Accounting: Businesses using the accrual method must record bad debt as an expense to correctly offset revenue recognized but not collected, ensuring accurate net income.
• Core Methodology: Credit Memo/Discount to Bad Debt Expense: The established procedure involves creating a Credit Memo (QBO) or using the Discounts and Credits feature (QBD) to clear the invoice balance, posting the amount to the Bad Debt Expense account (SG&A).
• Critical Error: Avoid Deleting Invoices: Deleting an unpaid invoice is strictly forbidden as it destroys the necessary audit trail, results in sales tax overpayment on uncollected revenue, and creates unbilled item clutter.
• Proactive Management via AR Aging Report: The Accounts Receivable Aging Detail Report is the primary diagnostic tool, recommended for review at least monthly, to identify high-risk invoices, particularly those over 90 days past due, for timely collection action.
• Tax/Accounting Distinction: Cash vs. Accrual: Tax deductions for bad debt are typically not permissible for businesses using the cash accounting method because the uncollected amount was never included in taxable income. The deduction is available only to accrual-basis taxpayers.
• Write-Off vs. Discount: A bad debt write-off is an expense for a final loss due to non-payment, whereas an early payment discount is a contra-revenue entry used as a sales incentive.

Here’s an Example of Bad Debt Expense 

Let’s understand bad debt with an example. Consider a retailer, UK Ltd., that has sold products worth £10,000 to a customer, PZ, on credit. However, PZ filed for bankruptcy and is unable to make the payment. In this case, £10,000 becomes a bad debt for UK Ltd.

Uncollectible invoices are an unfortunate reality for all kinds of businesses. Although many customers enter into a business relationship intending to pay in full and on time, sometimes they are unable to make their payments as promised. And sometimes they cannot make a payment at all.

Once it happens, this becomes necessary to write off the uncollectible invoice. You can record bad debt expenses only if you follow the accrual accounting system. However, if you follow the cash-based method of accounting, you’ll only record revenue once the payment physically arrives in your company’s bank account. 

Why do Bad Debts Happen?

Bad debt can occur for several reasons; some of the most common are:

• Disagreements: Customers express dissatisfaction with your product or service quality and refuse to pay their invoices.
• Bankruptcy: Customers go bankrupt and are unable to make payments.
• Poor Communication: Sales teams offer credit terms without the accounts receivable (AR) department’s input, creating misunderstandings around payment terms.

Reasons to Record a Bad Debt in QuickBooks

There are a couple of reasons why you might want to write off an invoice in QuickBooks:

• Bad debt: Sometimes, a customer is unable to pay an invoice due to a financial crisis beyond their control. Less frequently, customers choose not to pay for other reasons. In either case, if a customer defaults on a payment, it’s important to recognize this default properly in your books by writing off the invoice.
• Underpayment: Maybe your customer has made a payment on your invoice, but there is still a balance due on it. This is usually due to a clerical error on the customer’s end. In cases of underpayment, the amount is often too small — sometimes only pennies — to warrant reaching out to the customer for the remainder of the payment.

Select Your Accounting Method Before Recording a Bad Debt in QuickBooks

When invoices you send in QuickBooks become uncollectible, you must record them as a bad debt and write them off. Before moving forward, you need to choose any one method based on your accounting products & services. 

Accrual: Your business reports income and expenses for completed and pending transactions.

Cash: Your business reports the income and expenses only for completed transactions.

Steps to Record/Write off Bad Debt in QuickBooks Desktop 

When invoices you send in QuickBooks Desktop become uncollectible, you have to record them as a bad debt and write them off. This ensures your accounts receivable and net income stay up-to-date. 

Tip: The Accounts Receivable Aging Detail report can help you monitor your customers’ open balances.

Step 1: Add an expense account to track the bad debt

1. Navigate to the Lists menu and then choose the Chart of Accounts.
2. Select the Account menu and then New.
3. Click on Expense, then press Continue.
4. Type an Account Name, for example, Bad Debt.
5. Hit the Save and Close tabs.

Step 2: Close out the unpaid invoices

1. Move to the Customers menu and then click on Receive Payments.
2. Write down the name of the customer in the Received from field.
3. For the Payment amount, enter $0.00.
4. Choose Discounts and credits.
5. Under the Amount of Discount field, type the amount you’d like to write off.
6. For Discount Account, select the account you’ve added in step 1, and then hit Done.
7. Press Save and Close.

Steps to Record/Write off Bad Debt in QuickBooks Online 

Bad debt means a customer owes you money but you can’t collect it. They have a debt with you, but you know you aren’t going to get paid. If your business uses accrual method accounting, you can sometimes write off bad debt as a deduction.

When invoices you send in QuickBooks become uncollectible, you need to record them as a bad debt and write them off. This ensures your accounts receivable and net income stay up-to-date.

Step 1: Identify the Bad Debts

You can add a note next to their name in QuickBooks Online to easily identify bad debts in the future.

1. Navigate to Get Paid & pay and then select Customers.
2. Click on the customer’s name.
3. Press Edit at the upper right corner. 
4. Under the Display Name as field, enter Bad Debt or No Credit after the customer name.
5. Hit the Save icon.

Step 2: Check your aging Accounts Receivable

Review other invoices or receivables that must be considered as bad debt using the Accounts Receivable Aging Detail report.

1. Move to Reports.
2. Locate and open an Accounts Receivable Aging Detail report.
3. Review which outstanding accounts receivable should be written off.

Step 3: Create a Bad Debts Expense Account

If you haven’t already, create a bad debts expense account. Here’s how:

1. Go to Settings and then choose Chart of accounts
2. Click New to create a new account at the upper right corner.
3. Select Expenses from the Account Type dropdown menu.
4. Under the Detail Type dropdown, choose Bad Debts.
5. Type Bad debts in the Name field section.
6. Press the Save and Close buttons.

Step 4: Create a Bad Debt Item

Create a non-inventory item as a placeholder for the bad debt. This isn’t a real item, it’s just to balance the accounting.

1. Hover over Settings and then choose Products & services.
2. Click New and then Non-inventory in the upper right corner.
3. Enter Bad debts in the Name field.
4. Select Bad Debts from the Income Account dropdown menu.
5. Hit the Save and Close tabs.

Step 5: Create a Credit Memo for the Bad Debt

1. Click + New.
2. Now, select Credit memo.
3. Choose the customer from the Customer dropdown menu.
4. Under the Product/Service section, click on Bad Debts.
5. In the Amount column, type the amount you want to write off.
6. Enter Bad Debt under the Message displayed on the statement box. 
7. Press the Save and Close buttons.

Step 6: Apply the Credit Memo to the Invoice

1. Click + New.
2. Select Receive payment under Customers. 
3. Choose the appropriate customer from the Customer dropdown menu.
4. Under the Outstanding Transactions section, click on the invoice.
5. Hit the credit memo in the Credits section. 
6. Press Save and Close.

Now, the uncollectible receivable appears on your Profit and Loss report in the Bad Debts expense account. 

Step 7: Run a Bad Debts Report

You can run an Account QuickReport to check all the receivables you tagged as bad debt. For this, do the following:

1. Navigate to Settings and then choose a Chart of accounts.
2. Under the Action column of the bad debts account, select Run report.

Note: You can describe a bad-debt entity apart from your other customers by adding a note to their name:

3. Go to Sales, then click on Customers. 
4. Choose the customer’s name.
5. Hit the Edit tab at the upper right corner.
6. In the Display Name as field, type Bad Debt or No Credit after the customer name.
7. Press Save.

Mistakes to avoid when recording a bad debt in QuickBooks

To simply write off/ record an invoice in QuickBooks, deleting the invoice is considered one of the best ways. But don’t do this. Deleting the invoice rather than properly writing it off can have the following impacts on your business accounting and bookkeeping services:

• Lose Valuable Information: If you write off an invoice for a customer due to bad debt, you would like to retain this information so you don’t sell to that customer on credit again. If you delete the invoice, you will lose this information. Similarly, you need to be able to tell what percentage of your invoices you write off. This is a valuable business metric that will help you to manage your business more effectively and profitably.
• Overpay your Sales Tax Obligations: If you simply delete an invoice in QuickBooks, you run the risk of skewing your sales tax payable liability account. This may result in you remitting sales taxes you never actually collected.
• Items will be marked unbilled: Deleting an invoice in QuickBooks will make all the items on that invoice appear unbilled. If you continue to do business with the customer whose invoice you wrote off, these items will show up each time you try to invoice the customer, causing confusion and clutter in your books.

Advanced Aspects of Recording Bad Debt in QuickBooks

Writing off bad debt is more than just clearing unpaid invoices — it’s about preserving financial accuracy, protecting cash flow, and making informed decisions. While the basic steps of recording bad debt in QuickBooks are essential, understanding the surrounding mechanics can prevent costly mistakes. In this section, we explore five advanced subtopics: from distinguishing bad debt from discounts to reversing write-off errors. Each point is built to enhance precision, optimize your accounting workflows, and give you full control over receivables and reporting. Let’s break down these high-impact insights step-by-step.

Difference Between Bad Debt Write-Off and Discount Handling in QuickBooks

Bad debt write-off in QuickBooks removes uncollectible amounts, while discounts reduce invoice totals as customer incentives. In write-offs, the entire balance (e.g., $500) is cleared due to non-payment, impacting net income, accounts receivable, and SG&A. Discounts, like 2% on early payment of a $1,000 invoice, improve cash flow, customer relations, and payment cycles. Write-offs are recorded under expense accounts, while discounts hit income reduction lines. Write-offs usually follow 90+ days of non-payment; discounts apply instantly. Misusing either skews profit margins, tax reports, and customer balances. Always evaluate intent (non-payment vs. reward) before choosing one to maintain accurate financial records.

Impact of Bad Debt on Financial Statements in Accrual vs. Cash Accounting

In accrual accounting, bad debt affects income statements, balance sheets, and tax calculations. For example, a $2,000 uncollected invoice reduces both receivables and net income immediately. In contrast, cash accounting ignores bad debt entirely since revenue is recorded only upon receipt. Accrual gives a clearer view of expected cash flow, risk exposure, and profit trends. Cash method avoids overstatement but hides potential losses, aging balances, and bad customer behavior. Choosing the wrong method distorts real earnings, budgeting accuracy, and debt planning. Always align your accounting method with your industry standards, compliance requirements, and long-term reporting goals.

How to Use the Accounts Receivable Aging Report to Predict Bad Debt

The Accounts Receivable Aging Report segments unpaid invoices into 0–30, 31–60, 61–90, and 90+ day brackets. Invoices over 90 days (e.g., $1,500) signal high risk and potential bad debt. This report helps spot delayed payments, weak credit control, and frequent defaulters. Regular analysis reduces cash flow shocks, missed write-offs, and poor collection strategies. Filtering by customer shows patterns like 3 missed payments in 6 months. Use the data to set credit limits, payment reminders, and follow-up schedules. QuickBooks updates this report in real-time, allowing proactive actions that improve AR turnover, reduce write-offs, and protect profits.

Best Practices for Setting Up a Bad Debt Policy in QuickBooks

A strong bad debt policy sets thresholds, timelines, and workflows. Start by defining when to write off — e.g., after 120 days, 3 failed reminders, and 1 legal notice. Use QuickBooks to tag risky accounts, track aging invoices, and automate follow-ups. Assign roles: collections team sends reminders every 15 days; managers approve write-offs over $500. Document procedures in QuickBooks notes for 100% visibility. Review the policy every 6 months to adapt to new trends, customer behavior, and tax rules. A clear policy reduces revenue leakage, improves consistency, and strengthens financial control across departments.

Steps to Revert a Mistaken Bad Debt Write-Off in QuickBooks

To revert a mistaken write-off, first locate the credit memo or journal entry used—usually within the last 30–60 days. In QuickBooks, go to “Customers” > “Transaction List” and filter by date or amount (e.g., $750). Delete or edit the entry to restore the original invoice. Next, reopen the invoice by marking it unpaid, resetting receivables, and clearing the bad debt account. Recheck your AR Aging Report to confirm correction. Mistakes like this can distort revenue, AR balances, and tax deductions. Always review write-offs monthly, track by customer name, and document reversals to avoid financial misstatements.

Practical Add-Ons: Strengthening Bad Debt Management Beyond the Basics

Recording bad debt correctly is vital—but preventing it altogether is smarter. This section offers five supplementary strategies to help businesses go beyond just write-offs. You’ll learn how to spot high-risk customers early, communicate effectively before escalation, understand legal implications, and use QuickBooks data and integrations to your advantage. These insights are designed to reduce bad debt incidents, protect revenue, and automate your financial safeguards. Whether you’re running solo or managing a team, applying these practices will elevate your receivables management and keep your books cleaner.

Common Warning Signs a Customer May Default on Payment

Customers show early signs before defaulting — spotting them can save you money, time, and stress. Repeated late payments (3 or more in 6 months), bounced checks, or partial settlements (e.g., paying $400 on a $1,000 invoice) signal financial strain. Sudden changes like unresponsive behavior, new contact persons, or frequent disputes also raise red flags. If a customer exceeds credit limits by 15% or more, or if their AR aging exceeds 90 days for multiple invoices, take caution. Use QuickBooks notes to flag these accounts, set payment alerts, and tighten terms before losses escalate.

How to Communicate with Customers Before Declaring an Invoice as Bad Debt

Clear communication reduces bad debts, salvages relationships, and protects cash flow. Start with a friendly reminder after 7 days, a firm follow-up after 30, and a final notice by 60–90 days. Use QuickBooks to send statements, attach the invoice, and document every attempt. Escalate with a phone call if no reply after 3 emails. Offer payment plans for overdue amounts above $500 or partial settlements if needed. Keep the tone professional—mention terms, deadlines, and consequences clearly. Logging all communication builds proof, reduces disputes, and supports write-offs if the debt becomes unrecoverable.

Legal and Tax Considerations When Writing Off Bad Debt

Writing off bad debt impacts taxes, audit trails, and compliance. For amounts over $1,000, maintain proof of attempted collection, communication logs, and contract terms. In many regions, only accrual-based businesses can claim tax deductions on bad debts. Ensure the invoice is recorded as income first, then written off through a bad debt expense account. Improper classification can trigger audits, penalties, or rejected deductions. Consult a tax advisor annually to align QuickBooks entries with legal rules, IRS/ITR guidelines, and financial audits. Accurate records ensure legal safety, tax benefits, and clean books.

Using QuickBooks Reports to Analyze Trends in Bad Debt

QuickBooks reports help detect patterns, high-risk accounts, and recurring issues in bad debts. Use the Accounts Receivable Aging Summary to find overdue invoices over 90 days—e.g., 5 accounts totaling $7,200. Run a Profit and Loss by Customer report monthly to spot low-performing clients or write-off-heavy accounts. The Bad Debts Account QuickReport highlights how often debts are written off and their amounts over 6–12 months. Compare year-over-year trends to see if bad debt is rising beyond 2–3% of revenue. These reports inform credit policy updates, collection efforts, and strategic decisions.

Integrating Collection Tools or Add-ons with QuickBooks to Reduce Bad Debts

Third-party tools boost collection speed, reduce manual follow-ups, and lower bad debt risk. Apps like CollBox, Chaser, or TSheets sync with QuickBooks to automate reminders, track overdue invoices, and escalate aged receivables. Set up auto-reminders for 30, 60, and 90-day marks, saving hours weekly and recovering debts faster. Collection platforms offer dashboards that flag accounts exceeding $1,000 unpaid or 90+ days overdue. Some even connect with agencies if debts go unresolved. Integrating tools cuts follow-up gaps, improves cash flow predictability, and brings down write-offs by 20–30% annually.

Bottom Line!

Bad debt expense ensures that your financial statements reflect the true profitability of your business. It reduces the receivables on your balance sheet and must be recorded as an expense under Sales, General, and Administrative expenses (SG&A) on the income statement. This estimate reflects the amount of receivables expected to go uncollected over a specific period.

Bad debt commonly occurs in a situation where services or products have been delivered and the invoices sent, but the payment never arrives. After some time, the invoice is deemed uncollectible and written off as bad debt. Recording bad debt in QuickBooks ensures that your receivables and profit and loss statements are accurate, reflecting the lost revenue from unpaid invoices.

Frequently Asked Questions

Why can’t I simply delete an unpaid invoice in QuickBooks instead of writing it off as bad debt?

Deleting an invoice is strongly discouraged because it corrupts your financial records and can lead to immediate problems. The primary negative consequences are:

• Audit Trail Loss: Deleting the invoice completely removes the original transaction history. This eliminates the audit trail required for tracking customer defaults and for supporting your tax deductions.
• Sales Tax Overpayment: If your business is on the accrual basis, and sales tax was applied to the original invoice, deleting it does not automatically reduce your sales tax liability. This forces you to overpay sales taxes on income you never received.
• Unbilled Items Clutter: Any associated items or services on the deleted invoice may revert to an “unbilled” status, leading to confusion and inaccuracies in your inventory or service tracking.

To write off the debt correctly, you must use a Credit Memo (QuickBooks Online) or the Discounts and Credits feature on the payment screen (QuickBooks Desktop), linked to a Bad Debt Expense account.

How does writing off a bad debt affect my Profit and Loss (P&L) report under the accrual method?

When performed correctly under the accrual accounting method, writing off a bad debt ensures your P&L accurately reflects your true earnings.

The write-off is recorded as an accounting entry that does the following:

• Reduces Revenue: The entry effectively removes the revenue associated with the uncollectible sale.
• Increases Expense: The amount is posted as an increase (debit) to the Bad Debts Expense Account.
• Classification: This expense is typically classified under Selling, General, and Administrative Expenses (SG&A) on your P&L, resulting in a reduction of your net income for the period.

This action corrects the initial accrual entry that recorded the revenue when the invoice was first issued.

What is the key difference between recording a bad debt write-off and applying an early payment discount in QuickBooks?

The difference lies in the intent and the accounting classification:

• Bad Debt Write-Off:
  • Intent: To clear an amount that is uncollectible due to the customer’s inability or refusal to pay (a definitive loss).
  • Account Impact: Posts to the Bad Debt Expense account (an operating expense).
• Early Payment Discount:
  • Intent: To incentivize fast payment by offering a deduction (a controlled revenue reduction).
  • Account Impact: Posts to a Sales Discounts account (a contra-revenue account, which reduces your total sales/gross revenue).

Using the correct method is crucial for accurate internal reporting, as it affects the interpretation of your sales performance versus your collections efficiency.

How frequently should I run the Accounts Receivable Aging Detail Report to proactively manage potential bad debts?

To maintain optimal cash flow and effectively manage credit risk, businesses should run the Accounts Receivable Aging Detail Report at least monthly, and preferably bi-weekly.

This frequency is necessary because:

• It helps you identify accounts where invoices are consistently moving into riskier categories, such as 61–90 days and 91+ days past due.
• Timely review allows you to execute your collections strategy (e.g., sending final notices) before the debt meets your company’s official write-off criteria (e.g., 120 days), maximizing recovery chances.

Can I claim a tax deduction for a bad debt in QuickBooks if my business uses the cash method of accounting?

Generally, no, a bad debt deduction is not permissible for amounts related to unpaid sales if your business operates on the cash method for tax purposes.

This rule is based on the following IRS principle:

• A tax deduction for bad debt can only be claimed if the amount was previously included in your income.
• Under the cash method, revenue is only recorded when cash is physically received. Since you never received the cash and thus never included the revenue in your taxable income, you have no basis for claiming a loss (deduction) on that uncollected amount.

Note: Only businesses using the accrual method (which records revenue when earned) may claim a business bad debt deduction, provided the debt is determined to be worthless. Always consult a tax advisor.

What is the crucial first step if I discover I accidentally wrote off a good invoice as bad debt in QuickBooks?

The essential first step is to locate and reverse the specific transaction that created the mistaken write-off.

• Locate the Entry: You must find the original Credit Memo or the Journal Entry that was used to clear the invoice.
• Reverse the Transaction: In most cases, you will need to delete or void the incorrect Credit Memo/Journal Entry.
• Result: Deleting the bad entry will automatically re-open the original invoice in the customer’s account and correct the balances in your Accounts Receivable and Bad Debt Expense accounts, restoring the accurate financial picture.

My customer paid a bad debt invoice that I already wrote off. How do I record this recovery in QuickBooks?

Recording a recovery requires a two-step accounting process to ensure the cash receipt and the expense reversal are properly documented:

1. Reverse the Original Write-Off: You must first reverse the original bad debt entry (Credit Memo or Journal Entry) for the amount recovered. This action reinstates the Accounts Receivable balance and reduces (credits) the Bad Debt Expense account, reversing the loss.
2. Record the Payment: Once the invoice is technically “open” again, use the Receive Payments function to record the cash receipt against the restored invoice.

For tax purposes, any recovered amount that was previously deducted as a business expense must generally be reported as taxable income in the year of recovery.

Disclaimer: The information outlined above for “How to Record a Bad Debt in QuickBooks Desktop and Online?” is applicable to all supported versions, including QuickBooks Desktop Pro, Premier, Accountant, and Enterprise. It is designed to work with operating systems such as Windows 7, 10, and 11, as well as macOS.