If you are using the accrual method of accounting and you extend credit to
your customers, as soon as you create an invoice it is recorded in QuickBooks
as an account receivable. Unfortunately, you won't always collect all
credit you have extended. From time to time you'll have bad
debt—money you billed a customer that will never be collected.
Every bad debt has a story and you need to talk to customers who refuse
to pay their invoice. Discussing the reason for nonpayment may provide you the
information necessary to prevent the problem from occurring again. Be proactive
and contact the customer as soon as the invoice is late. You can use QuickBooks
to prepare a collection
Generally, you should write off bad debt only after exhaustive efforts to
collect. For any significant amounts, you should call the customer until
you're convinced the customer can't or won't pay. The rules change
if you receive notification that the customer has filed for bankruptcy. At this
point the law provides a procedure for filing a claim for payment. Further
efforts of collection may violate federal law.
QuickBooks can help you write off an underpayment at the time
you receive payments. If an underpayment is applied to an invoice, you will see
an option in the Receive Payments window to write off the bad debt right away.
The instructions here for tracking and writing off bad debt describe a way to
handle underpayments that you don't write off immediately.
At the end of the year, you'll want to write off the outstanding
customer invoices you know aren't going to be paid. This will clear the
invoice out of Accounts Receivable, increase the balance in your bad debt
account, and decrease your net profit by the amount of the unpaid invoice.
Handling bad debt involves two processes:
Tracking bad debt
Writing off bad debt