It’s not uncommon for businesses to allow customers to pay after their product or service has been delivered. A landscaping company, for example, may send its customers an invoice requesting payment after their landscaping service has been finished. Unfortunately, though, customers don’t always pay. And when a customer fails to pay, it can hurt a business’s finances. As a business owner, it’s important that you understand bad debt and the process for recording it in your accounting software.
Bad Debt Explained
Bad debt is any debt that you are unable to collect from the respective customer or client. Debt becomes bad after you’ve exhausted all collection attempts to no avail. If you’ve contacted the customer a dozen or more times and haven’t been able to collect payment, it’s probably a good idea to write it off as a bad debt. Recording the unpaid invoice as bad debt helps to balance your business’s books so that it doesn’t appear as revenue when the customer never paid for it.
The Cash Basis Method
In Quickbooks, you can record bad debt using the cash basis method. According to Intuit, this is the correct way to record it if you file your business’s taxes on a cash basis. It eliminates the unpaid invoice as income, essentially lowering your taxable income and improving your business’s finances in the process.
To record bad debt using the cash basis method, you’ll need to void or delete the unpaid invoice. This is done by logging in to your Quickbooks account and choosing “Sales” or “Invoices” at the top of the menu, followed by “Customers.” From here, choose the name of the customer who didn’t pay his or her invoice. Next, click “Open Invoices” next to the drop-down menu for “Show.” You can then select a date range for “Date” to narrow down your selection of invoices. Once you’ve located the unpaid invoice, click it to select it. This will open the invoice, at which point you can choose “More,” followed by “Void.” Quickbooks will then ask you to confirm the voiding of the invoice.
While optional, many business owners prefer to add a memo to unpaid invoices recorded as bad debt. You can do this by going back into your Quickbooks account and opening the invoice, followed by adding a memo with the note “bad debt.”
Did this tutorial work for you? Let us know in the comments section below!