Bad debt is a harsh but very real reality in maintaining the financial health of every business. In case your company is cash basis and using QuickBooks tool hub Desktop, there’s a better approach to writing off bad debt. This article will guide you through the proper steps on how to write off bad debt in QuickBooks Desktop, representing your company’s reality in financial records.
QuickBooks Desktop makes it pretty easy to expense bad debts on a cash basis by just following these easy steps, but it is so important that you keep your financial statements accurate. The above process will ensure that your accounts truly reflect the position while keeping you in compliance with cash-based accounting principles. Remember to maintain detailed accounts of all of your transactions and make an effort to frequently check on your accounts receivable to avoid accumulating bad debts in the future Before going into the details of the treatment on account of bad debt write-off
Cash Accounting: How It Works
Before going into the details of the treatment on account of bad debt write-off, it is very much essential to understand cash basis accounting. Cash basis accounting applies to that account where revenue is recognized only on the receipt of cash, and the same with expenses upon cash payment. That is you will not report income until you receive payment, so the process for handling bad debts is a little different under accrual accounting.
Identifying Bad Debt
You have to identify what accounts you cannot collect. There can be many reasons for this, but some common reasons to write off a debt are:
- Customer bankruptcy
- Dispute on services/products
- Customers who have moved out and cannot be located
- Do all that is in your power to collect the debt before you write it off.
- How to Write Off Bad Debt in QuickBooks Desktop
- Setup Bad Debt Expense Account
- Open QuickBooks Desktop
- Under the Lists menu select Chart of Accounts.
- Select the Account choice at the lower left and then New.
- Account Type – Expense; Click Continue
- Give the account a name, such as “Bad Debt Expense”, and input anything else you would like.
- Click Save & Close.
Issuing a Credit Memo for Bad Debt
- Open the Customers option on the menu. Choose Create Credit Memos/Refunds.
- Select the customer’s debt to write off.
- Date Product/Service Enter a service item called “Bad Debt” which would be linked to the bad debt expense account.
- Put in the amount of the debt here in the Amount field. Save the credit memo.
Apply the Credit Memo to the Invoice
- Click on Customers in the menu, then Receive Payments. Pick a customer from the list.
- Go to the Received From field, and double-click on the customer.
- Select the check box next to the Create invoice to be written off and the check box next to the new credit memo that you’ve created.
- QuickBooks automatically changes the amount to indicate that the invoice is now covered by the credit memo.
- Click Save & Close.
Run Reports
- Show New Changes
- Once you have written off the bad debt, you can run a report indicating the changes.
- Pull down the Reports menu to see Customer & Receivables, and then A/R Aging Summary.
- Double-check that the written-off invoice does not appear on this report.
Document Your Write-Off
All your bad debt write-offs should be recorded for future reference and auditing. Maintain a record of all correspondence with the customer and any internal notes regarding the write-off decision.
Best Practices to Manage Bad Debt
Accounts Receivable: From time to time, keep an eye on accounts receivable to find any potential bad debt as early as possible.
Establish Clear Credit Policy: Formulate rules on granting credit to customers which include both credit checks as well as limits.
Communicate with Customers regarding Payment: You should maintain an open line of communication with your customers about your payments.
Avail Collections: Avail collections agency for persistent delinquencies before writing off bad debts
Conclusion
QuickBooks Desktop makes it pretty easy to expense bad debts on a cash basis by just following these easy steps, but it is so important that you keep your financial statements accurate. The above process will ensure that your accounts truly reflect the position while keeping you in compliance with cash-based accounting principles. Remember to maintain detailed accounts of all of your transactions and make an effort to frequently check on your accounts receivable to avoid accumulating bad debts in the future Before going into the details of the treatment on account of bad debt write-off, it is very much essential to understand cash basis accounting. Cash basis accounting applies to that account where revenue is recognized only on the receipt of cash, and the same with expenses upon cash payment. That is you will not report income until you receive payment, so the process for handling bad debts is a little different under accrual accounting.
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