Accounting for Bad Debts

To correctly account for uncollectible sales, both cash and accrual businesses can use the same process. You’ll need to set up an Other Charge item for bad debts, and you’ll use this item on credit memos to write off the uncollectible invoices. (Go to Lists, Item List, Ctrl+N to add a new item) We suggest that the Bad Debt item point to an expense account if you run your business on an accrual basis (Bad Debt Expense) and to an income account if you run your business on a cash basis (Sales).When you create your credit memo, you’ll need the original invoice to appropriately distribute taxable and non-taxable portions of the credit memo.Follow these steps to create the credit memo:

1. Open the Customers menu and click Create Credit Memos/Refunds.
2. In the Create Credit Memos/Refunds window that appears, select the customer and assign a credit memo number; we typically include some identifiable portion of the original invoice number in the credit memo number.
3. Use the Bad Debt expense items in the line item section. If the original invoice showed both taxable and non-taxable items, include the Bad Debt item twice on your credit memo and set the Tax column to non-taxable for the appropriate line.
4. Fill in the total taxable amount on the taxable line and the total non-taxable amount on the non-taxable line.
5. Click Save & Close. Note: We don't use the original items sold on the credit memo because we don't want to return them to inventory.

1. Open the Customers menu and click Receive Payments.
2. In the Receive Payments window that appears, select the Customer:Job. At the bottom of the window, you’ll see an amount in the Unused Credits field (see Figure 6).
3. In the Applied To section of the window, click the invoice that you want to credit.
4. Click the Set Credits button. The Discount and Credits window appears so that you can select a credit.
5. Select the credit and click Done. The Receive Payments window reappears. At the bottom, you’ll see the Unused Credits amount has been reduced by the amount of the credit. You’ll also see that the credit amount appears in the Credits column of the invoice you clicked in Step 3.
6. Click Save & Close.