You make the final phone call, only to hear a recording that the line has been disconnected. You send a letter certified mail, only to get it returned unopened. Now what? Unfortunately, your accounts receivable balance for that customer has turned to bad debt. As the aging of your accounts receivable grows, so does your potential for bad debt. When you have exhausted all efforts to collect from a customer, you will need to remove the receivable from your books. This is known as a bad debt write-off. There are several ways to accomplish this in QuickBooks®. The following are a few options:
Enter a journal entry, debiting a Bad Debt expense account and crediting Accounts Receivable (be sure to include the customer name).
Use the Discounts And Credits option in the customer Receive Payment window to write off the balance of a particular customer invoice(s). Use a Bad Debt expense account as your discount account.
If sales tax is involved, create a credit memo to the customer, using a "bad debt" item (directed to the account for bad debt expense), and mark the item as taxable. QuickBooks will reduce the sales tax liability account accordingly. You will need to edit the amount on the bad debt line to reflect the pretax amount of the write-off.
Finally, be sure to apply the journal entry or credit memo to the outstanding invoice(s).
Better yet, avoid bad debt altogether! Set up appropriate credit policies and limits for your customers. Contact Porte Brown if you need help setting these policies or have questions about removing bad balances in QuickBooks.
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