QuickBooks Bad Debt Write-Off

Setting up the account and the item

The setup is done once and then reused for every write-off.

First the account. In the Chart of accounts, create a new account with the account type Expenses and the detail type Bad debts, and name it Bad debts. This is where every written-off amount will collect, so it becomes the line on your Profit and Loss report that shows how much you failed to collect in a period.

Then the item. In Products and services, create a new Non-inventory item named Bad debts. Tick the box that says you sell it to customers, and set its income account to the Bad debts expense account you just made. Pointing an item’s income account at an expense account is what makes Intuit’s method work: when the item is used on a credit memo, the credit lands in the expense account rather than reducing a revenue account.

Writing off an invoice, step by step

Intuit’s procedure starts with a report, not a transaction. Open the Accounts Receivable Aging Detail report and decide which open invoices you are writing off. The aging buckets are the usual evidence: an invoice that has sat in the oldest bucket with no contact is the typical candidate.

For each one, create a credit memo for the customer. Add the Bad debts item and enter the amount you are writing off. Intuit suggests typing “Bad Debt” in the message displayed on the statement, so the customer’s statement explains itself if anyone ever sends it.

Then apply the credit. Open Receive payment for the same customer, tick the unpaid invoice under Outstanding Transactions and the credit memo under Credits, and save. No money moves. The invoice is now paid in full by the credit, its balance leaves accounts receivable, and the amount appears in the Bad debts expense account.

To check the result, run the report for the Bad debts account from the Chart of accounts. Intuit also suggests an optional step: edit the customer and add “Bad Debt” or “No Credit” after the name in the Display name as field, so nobody extends them credit again without noticing.

Why a write-off is not a void

Voiding the invoice looks like a shortcut, and it gets the balance out of accounts receivable just as well. It records something different.

A void says the sale should not have existed. In QuickBooks Online the voided invoice stays in the register with its amounts set to zero, so the revenue disappears from the period it was originally booked in. If that period is already closed and reported, the change reaches back into it.

A write-off says the sale happened and the money did not come. The revenue stays in its original period, and the loss is recorded as an expense in the period you gave up on collecting. That is usually the honest description of a customer who went quiet, and it is the shape the IRS expects for a deduction: a business bad debt is deductible “only if the amount you were owed is included in your gross income in the current or prior year.” A voided invoice is not in income. The IRS adds that a cash method taxpayer “generally can’t take a bad debt deduction” for unpaid amounts of taxable income such as fees, because the income was never reported in the first place.

Intuit’s article does not cover sales tax. If the invoice charged tax, ask your accountant how the tax portion should be treated before you write it off. Businesses registered for VAT have a separate mechanism for reclaiming output tax on unpaid invoices, covered in VAT bad debt relief.

The QuickBooks Online Accountant write-off tool

Accountants working in QuickBooks Online Accountant have a bulk alternative. Under Accountant Tools, Write off invoices lists open invoices filtered by invoice age, a to date and a “balance less than” amount. You tick the invoices, choose Write off, pick your bad debt account and apply. Intuit says QuickBooks applies discounts to zero out the invoices and posts them to the write-off account, which balances accounts receivable against the expense account.

Intuit notes that you do not need the closing date password to write off invoices dated before the closing date.

Intuit adds that clients can write off their own invoices manually, which is the credit memo method above.

When the invoice came from Stripe

Stripe has its own version of giving up on an invoice. An open Stripe invoice can be marked uncollectible, which Stripe describes as: “The customer is unlikely to pay the invoice. Normally, you treat it as bad debt in your accounting process.” Stripe’s own example is a customer who received $1,000 of services and then declared bankruptcy.

Uncollectible is not final in Stripe. An uncollectible invoice can still be paid, or voided. So marking it in Stripe is a reversible statement that you do not expect the money, and the bookkeeping question is what that status should become in QuickBooks.

The answer depends on how the invoice reached QuickBooks. If someone keyed it in by hand, the Intuit method above applies directly. If a sync created it, check what the sync does with the uncollectible status before writing anything off by hand, so that the same invoice is not cleared twice.