Writing off an invoice to bad debt in QuickBooks Online
As an owner of a bookkeeping firm, I come across questions from clients and other small business owners all the time. One question I get often is, how do I write off an invoice to bad debt in Quickbooks Online? The answer is pretty simple and this video will teach you step by step how to write off an invoice to bad debt in Quickbooks Online.
We are going to use the Quickbooks Sample company file today to walk you through writing off an invoice to bad debt. In this scenario, we have invoiced Geeta Kalapatapu for a custom designed rock fountain. The job has been completed and Geeta has been invoiced for the work performed. After many attempts at collections, we find out that Geeta is no able to pay her balance due to personal reasons. We have decided that since her open balance in uncollectable, we will have to write off her invoice to bad debt.
There is a Simple 2 Step Method that you can use to write off the invoice to bad debt.
However, there are 2 set up steps that you will need to accomplish first before you can use the simple 2 step method.
First step in the setup, if you have not created the account already, you will need to create the “Bad Debt” expense account.
To do this step, you will need to click on “Accounting” then click on “Chart of Accounts”
Next you will click on the green “New” button near the top right of the screen
Under account type, you will select “Expense”
Under detail type, you will select “Bad Debts”
Finally, click on the green button “Save and Close”
Next step in the set up process, we are going to create the bad debt line item under the product and services section.
Click on “Sales” then click on “Products and Services”
Next, click on the green “New” button near the top right of the screen
Select“Service”
Under Name, enter “Bad Debt”
Under Income account, select the “Bad Debt” expense account we just created from the step above
Finally, click on the green button “Save and Close”
Now you are ready to follow the Simple 2 Step Method in writing the invoice off to bad debt.
Step 1: Create a credit memo for the customer
Click on the “ +New” button near the top left of the screen
Click on “Credit Memo”
Enter the “Customer” name that you are writing the invoice off for
Enter “Todays” date for the credit memo date
Under the “Product/Service column”, you will select the newly created “Bad Debt” service
In the description column you can enter any details you need as a reminder as to why the invoice is being written off in case you need to reference this again.
Enter the “Amount” of the invoice you are writing off
If this item is subject to sales tax, make sure the box is checked under “Tax”
If it doesn’t fill in for you, make sure you select the proper sales tax rate
Once your credit memo balance matches the outstanding balance owed plus tax then
Click the green button “Save and Close”
Step 2: Apply Credit memo against customer invoice to close out balance owed
Click on the “ +New” button near the top left of the screen
Click on “Receive payment”
Enter the “Customers Name” to bring the open invoice and credit memo forward
Check the box next to the invoice as well as the credit memo
Make sure the balance is zero
Click the green button “Save and Close”
For those of you that are writing off a balance that contains sales tax, following these steps will credit/reduce the balance owed to your state sales tax agency in the month you wrote off the invoice.
For your knowledge, I wanted to show you the result in writing off the invoice for Geeta Kalapatapu in March and the corresponding reduction in sales tax since her invoice balance was not collected. Since we invoiced her in the same month we wrote off the invoice, both transactions take place in the same month. If you were to invoice in one month and pay sales tax on that invoice, then wrote off the invoice in the following months, you will see a credit/reduction of sales tax in the month the invoice was written off.
I hope this video was helpful in teaching you the step by step process in writing off an invoice to bad debt.