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.

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.

FAQs:

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.

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.