A bed debt is an expense that you incur at the moment that you determine that a customer’s balance is uncollectable. Record the bad debt expense, but do not delete the original invoice (that they cannot pay) or remove the income that was recorded from that invoice. You earned that income. Accounts receivable will decrease.

This is an expense that’s a little different from the other expenses you have on your income statement. It’s not really part of normal expenses.

Chart of Accounts

Here’s what it would look like when we add this account.

There are two ways to record (write off) uncollectable accounts. You can use the journal entry method or the credit item method.

Journal Entry Method

In the top left of the screen, click + New, then Journal entry. We are going to debit Bad Debt Expense and credit accounts receivable for Danny Deadbeat. Click Save and Close and go back to the Open invoice report for Danny and you will see the minus, but it has not yet been applied. After applying it, they will be removed from the Open Invoice Report. Note that the Profit and Loss statement will show the Bad Debt Expense at the very bottom because it is an other expense. To apply it to the open invoice use the Receive Payment window. This time, the Receive Payment window guessed correctly and put a check mark on the correct invoice, as well as the “credit”. Make sure of the Amount Received box near the top is zero and the correct check boxes and amounts are there. Click Save and Close. Check your Open Invoice report.

Credit Item Method

Use this method when we have more bad debt expenses to enter each month, or you prefer to have a document that you can print and sign by the owner or other appropriate person.

You need to make an item in the Product and Services list. Call it Uncollectable Customer Account and then connect it to the Bad Debt Expense account. Then you are set up and ready to make a credit memo and put that new item on the credit memo with the amount of the customer’s balance. Next, apply it to the open invoices.

Go to the Cog Wheel, Products and Services, New item, Service, and call it Uncollectable Customers Account. Connect it to the Bad Debt Expense. However, I find that there may be a “bug” in QuickBooks because I can’t find the Bad Debt Expense in the drop down list under the Income account. It doesn’t want to show the Bad Debts Expense I just made. It’s not “refreshed”, as you can see in the screenshot below.

What do I do? I will sign out and sign back in to QuickBooks. That worked. Cool. I now see it in the drop down (see below). Also, make it non-taxable (if you can).

Now we can write off the second invoice, in our example. We do that by making a Credit Memo.

When we go to the Open Invoice report, for our customer in question, we see the Invoice and the Credit Memo listed, with the invoice as a positive number and the credit memo as a negative number, such that if they were added together we’d get zero. Click + New, Receive Payment, and choose the customer. Now we see the Credit Memo at the bottom and the Invoice above it. The Amount received should be zero and the other two should be checked. After clicking Save and Close we find that the customer no longer appears on the open invoice report.