How To Write Off Bad Debts in QuickBooks Online

Hello everyone. So today we are going to talk about bad debts. So occasionally you'll find yourself in a situation where a customer doesn't pay you despite your numerous efforts to collect. This sucks and is unfortunate. And in accounting parlance it is referred to as a bad debt. So there is a specific way to record this in any accounting software and we are going to go through the process of doing it in QuickBooks Online. So to start, there are two steps that only have to be done once and in the future you will be able to use these accounts to record future bad debts which hopefully won't happen, but sometimes they do. It is the cost of doing business, unfortunately. So let's look at these steps. So the first thing you're going to do is go to your chart of accounts.

And from here we are going to create a new account called Bad Debt Expense. So let's click on new. The account type will be expense. The detail type is actually available directly. So we'll enter that Bad Debts and the name of the account is Bad Debts, the default tax code you can leave blank because it will depend on how much tax you charge to the customer or client in the first place. So let's save and close this.

The second one time step is to create an Item or in QuickBooks parlance it is called a product or service. So we click here, we're going to click a new item and this item is necessary because it is used in invoices and credit notes and therefore it has to be set up and assigned to the account Bad Debt Expense. And then it will be available to reflect on your credit note. So to do this let's so let's click on new. We are going to choose service we will call Bad Debts.

And you can fill out the rest of this. But the important thing to reflect is the account to which it is connected. So we will select Bad Debts and the sales tax we can leave blank for now for the same reason as mentioned before and specifically choose it on the credit notes. So let's save and close this. So now we are ready to enter a bad debt expense in QuickBooks Online. So to identify the bad debt that you're going to be writing off.

I find it useful to go to reports and to select the accounts receivable in summary, which tells you exactly how much your clients owe you on a given day.

And here we will see how much we are owed. So let us say the Moriarty Inc. We all know how Moriarty is. He is not going to pay us. So let us go and Write this off as a bad debt. So to do that we will go to sales on the left hand side.

And here you will see your different options. I like to go to customers.

And in customers let's select Moriarty Inc. And here we will see all the transactions from Moriarty and we see the one that we have DEC to write off. So we are going to take a look at this.

So let's just click on this because I want to see how much tax was charged on the invoice.

So I can see here that.

The total amount of tax that was charged is 13% on 1375. So we are going to write off 1,375 plus HST of 13%. Let's exit out of here. Create a new transaction called Credit Memo.

The customer already assigned in this case because we were in the customer section. But if you do it from outside of the customer section you might just have to enter Moriarty Inc. Here you can enter all of the details. The date of the credit memo. If you plan to have it in the future. You can Change the date. QuickBooks automatically assigns this number. You can also change the number if you want to identify it as a credit memo. You can put CM in front or behind it and that makes it very clear that it is in fact a credit memo.

Now this is where the bad debt that we just created will be selected from the drop down. So we click on bad debts. If you recall the amount was 1375. It is exclusive of tax and the sales tax code that we're going to use is HST Ontario which brings us to the 1553 75. So let's save and close this. We've now created our credit memo.

And the next step is to offset the two. So, so if you look in the corner here, in the right hand corner you'll see the open balance is zero because you have an invoice and a credit. But this is still showing as overdue. So let's just simply click here Receive payment.

And if you scroll down you will see that the credit memo is available already automatically checked by quick because it noted that they were the same amount and the amount received. And this is extremely important that this is zero when you are offsetting a credit memo against an invoice because you were not making a payment. So once you have made sure that this is zero that these amounts offset fully against each other. If you were only writing off a partial amount amount that is this credit memo was perhaps less than $1,500 then here the payment would match the amount of the credit memo and this would remain zero. Otherwise the payment will be reflected and that will show up on your checking account and it will be incorrect. So now that this is done you can save and close.

And you'll see now that it has been applied closed and the overdue payment no longer appears in the corner.

So now we can we want to see how it looks on our report. So let's go back to our accounts Receivable agent summary and we'll see the Moriarty Inc. No longer appears as of today. And then the final report that I like to look at is the profit and loss just to see where it appears. So if I choose the date which is this fiscal year which you can scroll down and find run report and here you will see the bad debt expense of 1375 which is net of the sales tax, net of GST, HST or QST if you charged it and that will actually reduce the amount of sales tax that you owe.

So that concludes our tutorial on bad debts. I hope this was helpful. If you would like me to make more videos on QuickBooks Online, please leave a comment and also please feel free to like and subscribe. Have a great day.