WHAT IF: I need to write off a bad debt?

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Unfortunately we all sooner or later run into a situation where a customer we did work for didn’t pay us for one reason or another. So now we have an invoice posted in QuickBooks and it isn’t going anywhere.  It makes your Accounts Receivable aging look really bad even if you regularly collect everything else within a 30-day window. 

You might have thought about taking the customer to small claims court, but you really don’t have the time, and don’t want to waste the cost of filing with the court.  You are almost certain that the real reason you aren’t getting paid is the customer simply can afford to pay you.

Well if you are using the accrual method of accounting where you recognize income when it is ‘earned’ (rather than received) and expenses when they are ‘incurred’ (rather than paid), you may be eligible to discharge those bad debts in a manner that will reduce your tax liabilities, as long as you have attempted to collect the debt.

Before you write off any bad debt you generally must make exhaustive efforts to collect it. If your customer owes you a lot of money, you should call the customer until you’re convinced the customer can’t or won’t pay.

The rules for collecting change if your customer files for bankruptcy. At this point the law provides a procedure for filing a claim for payment. Further efforts at collection can violate federal law, so you need to check with your attorney in such a situation.

If you have made reasonable efforts and still can’t collect the bad debt then you can write off the debt in QuickBooks so you don’t keep seeing that open invoice.

Steps for Writing-off Debts for an Invoice when using Accrual Accounting:

  1. If you are using Accrual accounting, create an account called Bad Debts in your Chart of Accounts. Be sure to select Expense as the account type.
  2. From the Customers Menu choose Receive Payments.
  3. Select the name of the Customer who hasn’t paid you.
  4. Leave the amount field 0.00.
  5. Enter a memo that you’re writing off a bad debt.
  6. Click the Payment column for the invoice that hasn’t been paid.
  7. Click the Discount button.
  8. In the Discount window enter the amount of the bad debt in the Discount field and the name of your bad debt expense account (you created in step 1) in the Discount Account field.
  9. Click OK to record the write-off.

Better luck next time when it comes to collecting.