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Manage Bad Debt

There are times when an invoice becomes non-collectible and you need to write it off and declare it as bad debt so you can clear the invoice out of your accounts receivable and reduce your net profit by its amount.

This article provides you with methods for managing your bad debt. Before you proceed, consult your accounting professional and legal adviser about the advantages and disadvantages of each method to determine the best method for your business. Whichever method you choose, you'll need to set up accounts . Check with your accountant to ensure you have the correct accounts setup.

Manage bad debt case by case

 When an Invoice becomes non-collectible, write it off. However, this can lump bad debt into one period and does not match expense to income. 

Use the accrual method with an A/R contra account
Use the accrual method with an Other Current Asset account
Cash basis bad debt

When you use cash basis accounting, you do not have bad debt because your customer has not paid you and you have not recorded income from the invoice. However, if you are entering accrual transactions (invoices), then you may want to clear your Accounts Receivable invoices that will not be paid.

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