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Bad debt overview

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 letter.

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:

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