Write off bad debt in QuickBooks Online (2024)

FAQs

What is the best way to write off a bad debt in QuickBooks Online? ›

There are two different methods used to recognize bad debt expense. Using the direct write-off method, uncollectible accounts are written off directly to expense as they become uncollectible. On the other hand, the allowance method accrues an estimate that gets continually revised.

Estimate uncollectible receivables. Record the journal entry by debiting bad debt expense and crediting allowance for doubtful accounts. When you decide to write off an account, debit allowance for doubtful accounts and credit the corresponding receivables account.

When money owed to you becomes a bad debt, you need to write it off. Writing it off means adjusting your books to represent the real amounts of your current accounts. To write off bad debt, you need to remove it from the amount in your accounts receivable. Your business balance sheet will be affected by bad debt.

To be deductible, a debt must be a bona fide loan with an expectation of repayment and may include interest and a promissory note. The debt must be 100% worthless before it can be deducted. Documented efforts to collect the debt must be made, such as letters, invoices, and phone calls.

% of Bad Debt = Total Bad Debts / Total Credit Sales (or Total Accounts Receivable). Once you have your result, you can project it onto your current credit sales. So if your bad debt rate was 2%, you can move 2% of your current credit sales into your bad debt allowance.

To record the bad debt entry in your books, debit your Bad Debts Expense account and credit your Accounts Receivable account. To record the bad debt recovery transaction, debit your Accounts Receivable account and credit your Bad Debts Expense account.

What is an example of a write-off journal entry? ›

For example, say a company with $100,000 worth of inventory decides to write off $10,000 in inventory at the end of the year. First, the firm will credit the inventory account with the value of the write-off to reduce the balance. The value of the gross inventory will be reduced as such: $100,000 - $10,000 = $90,000.

A bad-debt expense anticipates future losses, while a write-off is a bookkeeping maneuver that simply acknowledges that a loss has occurred.

In the Product/Service section, select Bad debts. In the Amount column, enter the amount you want to write off. In the Message displayed on statement box, enter “Bad Debt.” Select Save and Close.

Under the direct write off method, when a small business determines an invoice is uncollectible they can debit the Bad Debts Expense account and credit Accounts Receivable immediately. This eliminates the revenue recorded as well as the outstanding balance owed to the business in the books.

Report a totally worthless nonbusiness bad debt as a short-term capital loss on Form 8949, Sales and Other Dispositions of Capital Assets, Part 1, line 1. Enter the name of the debtor and "bad debt statement attached" in column (a). Enter your basis in the bad debt in column (e) and enter zero in column (d).

Create a customer return for the value of the debt

A bad debt is applied to a customer's account by first creating a customer return. You can then apply the return to the outstanding invoice to write it off.

In particular, your allowance for doubtful accounts includes past-due invoices that your business does not expect to collect before the end of the accounting period. In other words, doubtful accounts, also known as bad debts, are an estimated percentage of accounts receivable that might never hit your bank account.

Accountants record bad debt as an expense under Sales, General, and Administrative expenses (SG&A) on the income statement. Recording bad debt doesn't mean you've lost that money forever. Companies retain the right to collect these receivables should conditions change.

Credit memos are issued to adjust for unpaid invoice balances due to a return, price adjustment or additional cost of doing business, such as a bank fee. Invoice write-offs are used less frequently in situations where the customer is disputing the invoice, unresponsive, or filing for bankruptcy.