If a customer owes you money, but is unlikely to pay, you can write off the bad debt. When you do this, the customer's outstanding balance is removed, your expenses are correctly updated, and any GST liability related to the sale is adjusted.
How does a bad debt affect your GST reporting?
It depends on whether you're reporting on a cash or accrual basis.
If you're cash-based, a bad debt won't affect the GST, because the GST is only reported once the payment has been received from the customer. Since the customer never paid the invoice, no GST has been reported.
If you're accrual-based, writing off a bad debt will only affect your GST if it has already been reported and paid. In Australia, using this method to write off a bad debt will result in the customer return being included in your BAS for this period at G1 (Total sales).
1. Create a Bad Debts expense category
If a Bad Debts expense category doesn't already exist in your category list, you need to create one as described below. Or, if you account for bad debts by posting a provision to an asset category, create a 'Provision for Bad Debts' asset category instead.
Go to theAccountingmenu and chooseCategories (Chart of accounts).
Look for a category calledBad Debts. It'll have a code starting with6-. If it's there, great! Skip down to task 2 to create a customer return for the debt.
If the category doesn't exist, clickCreate category.
Create a new expense category as shown in the following example. This is an example only - you can use a code and name that suits your category list.
You can select anyTax/GST codewhen creating this category, because when you create the customer return (in the next task), you need to select the same tax rate used on the invoice which is being written off.
ClickSave. Here's our example:
2. 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.
Go to theCreate menu and chooseInvoice. AnInvoice numberis automatically generated, based on the last number used. If you want, you can change this number.
Changing the numbering
If you change the number, you’ll change the automatic numbering. For example, if you change the number to000081, the next time you create a return, the new number will be000082.
Choose theCustomerwhose debt you're writing off.
ClickField layoutand selectServices.
Enter aDescriptionof what's being written off.
In theCategory column, choose theBad Debtsexpense category.
In theAmountcolumn, enter the amount being written off as a negative number.
For theTax/GST code, choose the same tax code used on the invoice being written off.
ClickSave.
3. Apply the customer return to the unpaid invoice
OK, here's the final task. You just need to apply the customer return to the outstanding invoice to write it off.
Go to the Salesmenu and choose Sales returns and credits.
Find the customer return you created in the previous task, then clickApply.Need help finding the return?
Enter aDescription of transaction, such as "writing off invoice", or similar.
Enter theAmount appliedfor the invoice being written off. The return can be applied to one or more invoices, so long as theTotal Amount Appliedmatches the totalBalance dueon the invoices.
ClickRecord. The bad debt is written off.
