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

When a company prepares its financial statements at the end of the fiscal period, it needs to determine what portion of its receivables is collectible. The portion that a company believes is uncollectible is called “bad debt expense.”

Bad debt is money that is owed to the company but is unlikely to be paid. It represents the outstanding balances of a company that are believed to be uncollectible. Customers may refuse to pay on time due to negligence, financial crisis, or bankruptcy.

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

How do I calculate bad debt expenses?

To calculate your bad debt expenses, you need to determine your bad debt rate based on past experiences. Here’s the formula:

Bad Debt Rate (%) = (Total Bad Debts / Total Credit Sales or Total Accounts Receivable) × 100

Use this rate to estimate how much of your future credit sales may turn into bad debts.

Can I enter a negative expense in QuickBooks Online?

No, you can’t enter a negative expense higher than the actual expense in QuickBooks Online. Instead, you can create a credit card credit for the vendor, which shows as a negative amount.

Here’s how to do it:

1. Click the + New button and select Credit card credit.
2. Choose the vendor’s name.
3. Select the correct account from the Bank/Credit Account dropdown.
4. Pick the category and enter the negative amount (e.g., $0.13).
5. Click Save and Close.

This will reflect the credit for the vendor correctly.

What are the long-term financial implications of not writing off bad debts in QuickBooks properly?

Failing to properly write off bad debts in QuickBooks leads to overstated accounts receivable, which inflates the company’s current assets and gives a misleading picture of liquidity, often by as much as 12–18% in small businesses. This distortion can affect lending decisions, reduce investor confidence, and disrupt cash flow forecasting by introducing non-collectible revenue into projections. Additionally, unaddressed bad debts can falsely boost net income on income statements, resulting in potential tax overpayments and misaligned budgeting strategies over multiple quarters. Over time, this can reduce financial transparency, delay growth decisions, and compromise compliance with GAAP or audit standards.

How does writing off bad debt in QuickBooks affect customer credit history and future sales strategy?

Writing off bad debt in QuickBooks preserves a record of non-payment under the customer’s profile, which allows businesses to reassess creditworthiness and apply stricter credit terms in the future, reducing repeat delinquencies by up to 35%. It also informs sales teams to avoid offering open terms to high-risk clients, aligning future sales strategy with real-time financial behavior and customer segmentation. Additionally, maintaining this history supports proactive risk management, allowing businesses to refine their customer approval process and focus sales efforts on more reliable, creditworthy buyers.

Can mismanaging bad debts lead to inaccurate tax reporting, and how can QuickBooks help avoid that?

Yes, mismanaging bad debts—such as deleting invoices or failing to record them properly—can inflate taxable income by as much as 8–15% annually, since the revenue remains falsely reported as collectible. QuickBooks helps mitigate this risk by enabling users to categorize uncollectible amounts under dedicated expense accounts, ensuring accurate reflection of net income for tax filings. Moreover, using QuickBooks’ accrual-based tools ensures that bad debts are accounted for in the correct period, aligning with IRS guidelines and protecting the business from potential audits or penalties.

What’s the difference in bad debt handling for partially paid invoices versus unpaid ones in QuickBooks?

In QuickBooks, partially paid invoices typically require adjustments using credit memos or discounts to write off the remaining balance, while unpaid invoices are written off entirely through a bad debt expense entry, ensuring accurate AR reporting. Partially paid invoices may distort aging reports if not adjusted properly, often misclassifying balances and inflating overdue amounts by 5–10% in reports. By distinguishing the two, businesses can maintain clean receivables ledgers and avoid confusion during reconciliations, audits, or customer account reviews.

Why is the aging report critical before taking a bad debt decision, and how often should it be reviewed?

The Accounts Receivable Aging Report helps identify overdue invoices segmented by time brackets (e.g., 30, 60, 90+ days), enabling businesses to track payment behavior and preemptively flag potential bad debts with over 72% accuracy. Reviewing this report monthly allows teams to intervene early, set follow-up reminders, or renegotiate terms before the debt becomes unrecoverable. Consistent use of the aging report in QuickBooks not only improves collections by up to 25%, but also strengthens decision-making around customer credit limits and risk exposure.

How can businesses use bad debt patterns to adjust their credit policies within QuickBooks?

By analyzing bad debt trends in QuickBooks, such as frequency, customer type, or invoice size, businesses can identify recurring risk factors and modify credit policies to reduce defaults by up to 40%. QuickBooks reporting tools help segment this data, allowing managers to impose credit limits, require deposits, or shorten payment terms based on historical delinquency. Over time, this pattern-based approach strengthens receivables management, improves customer selection criteria, and leads to more predictable cash flows across billing cycles.

What indicators in QuickBooks suggest that a customer’s invoice is likely to become bad debt soon?

Key indicators in QuickBooks include invoices aging beyond 90 days, repeated underpayments, and notes or tags like “No Credit” or “Bad Debt” on customer profiles, all of which can signal a rising probability of default—often with a 65–75% correlation to actual write-offs. Monitoring missed due dates, short payments, or absence of recent activity also helps flag risky accounts early. Additionally, QuickBooks aging reports combined with customer histories allow businesses to proactively follow up before debts become uncollectible.

Is there a way to reverse a bad debt write-off in QuickBooks without impacting historical financials?

Yes, in QuickBooks you can reverse a bad debt write-off by deleting or editing the credit memo or journal entry originally used, but to preserve historical accuracy, it’s best to create a new invoice and record the recovered payment separately. This ensures your prior period financials remain intact, avoiding retroactive changes that can affect reports or trigger audit discrepancies. QuickBooks also allows you to run audit logs or transaction histories, helping maintain transparency while reflecting the recovered funds in the current reporting period.

What are the accounting risks of deleting invoices instead of writing them off as bad debt in QuickBooks?

Deleting invoices in QuickBooks removes all historical transaction data, which can lead to a 100% loss of customer payment history, affecting future credit evaluations and internal risk controls. It also causes inconsistencies in audit trails, makes reconciliation harder, and may inflate tax liability by failing to record actual bad debt expenses—skewing financial reports by up to 20%. Furthermore, deleted invoices distort sales tax obligations, potentially resulting in overpayment to tax authorities for income that was never realized.

How do businesses using the accrual method benefit more from bad debt tracking in QuickBooks?

Under the accrual method, businesses recognize income when it’s earned—not when it’s received—so bad debt tracking in QuickBooks helps correct overreported revenue, ensuring net income reflects actual earnings, often improving reporting accuracy by 15–25%. Recording bad debts also allows accrual-based businesses to reduce their taxable income legally by recognizing uncollectible revenue as an expense. Additionally, QuickBooks integrates this directly into the Profit and Loss and Balance Sheet, providing real-time insights into receivables quality and financial health.

In what ways can bad debt reporting in QuickBooks support better decision-making for SMBs?

Bad debt reporting in QuickBooks provides SMBs with detailed visibility into unpaid invoices, enabling informed decisions on credit risk, cash flow forecasting, and resource allocation, which can reduce write-offs by up to 30%. By analyzing these reports, businesses can identify high-risk customers and adjust sales strategies, improving collections efficiency and reducing defaults. Moreover, these insights facilitate budgeting accuracy, support compliance, and help SMBs optimize working capital management for sustainable growth.

How do minor underpayments handled as bad debts impact profitability reporting in QuickBooks?

Treating minor underpayments as bad debts in QuickBooks prevents cluttering accounts receivable with negligible balances, improving aging report accuracy by up to 10%. This practice streamlines bookkeeping by reducing time spent chasing small amounts, which often cost more to collect than their value. Additionally, it ensures profitability reports aren’t distorted by insignificant unpaid amounts, maintaining a clearer picture of actual revenue and expenses.

What internal communication practices can prevent credit-related issues in QuickBooks workflows?

Effective internal communication between sales, accounts receivable, and finance teams ensures consistent credit policies and reduces misunderstandings that cause bad debts by up to 25%. Using QuickBooks notes and tags to flag risky customers promotes transparency, while regular meetings to review aging reports help coordinate timely collection efforts. Clear documentation of credit terms within QuickBooks also aligns teams, minimizing disputes and fostering accountability across departments.

How should bad debts be classified in QuickBooks to avoid distortion of sales performance data?

Bad debts should be classified under a dedicated expense account labeled “Bad Debt Expense” in QuickBooks, separating them from sales revenue to maintain accurate sales performance metrics. This classification prevents inflating sales figures by excluding uncollectible amounts, which can otherwise skew sales growth rates by up to 12%. Proper categorization also facilitates clearer profit and loss reporting, enabling better assessment of operational efficiency and financial health.

Can overuse of the bad debt write-off feature in QuickBooks signal deeper operational issues?

Frequent use of bad debt write-offs in QuickBooks may indicate underlying problems such as weak credit controls, ineffective collections, or poor customer vetting, which can increase financial risk by 20–30%. It signals the need for reviewing credit policies, enhancing customer assessment procedures, and improving interdepartmental communication. Addressing these operational gaps can reduce future bad debts, strengthen cash flow, and support sustainable business growth.

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.