A bad debt is an accounting term used for accounts receivables that will never get collected. It is also called an allowance for doubtful accounts. The IRS considers any funds in the accounts receivable as income, whether they have been paid or not. Using the bad debt or allowance for doubtful accounts allows the business owner to write off these amounts as uncollectible, and thus avoids paying taxes on income not received. There are two ways to write down (or write off) bad debts using QuickBooks.
Open the company QuickBooks file. Click on the "Lists" button located in the top menu bar. The Chart of Accounts is the first item on that list; click on that to open it up.
Create a "Bad Debt" expense account. Hit "CTRL-N" from the Chart of Accounts screen and add a new expense account. You may name it "Bad Debt Expense" or "Allowance for Doubtful Accounts," depending on your preference of which method to use for writing the bad debt off.
Choose the individual "Bad Debt" expense option. This means that for each individual account that fails to pay within a reasonable period of time to simply add that individual account as the bad debt. To do this, open up the "Make General Journal Entries" option. The first entry will be in the accounts receivable account. Enter a credit for the amount to be written off as a bad debt using the accounts receivable account. Enter a debit under the new "Bad Debt" expense account to balance out the amount removed.
Make sure to assign the accounts receivable credit to the client who didn't pay. Use the "Customer/Job" button for that. This method is the one that is most accurate, but takes the longest to complete as each late customer must be brought up and the decision to include them in "bad debt" must be considered.
Choose the "Allowance for Doubtful Accounts" option. Look at your company's profit and loss statement from the prior year and find a percentage of the amount that was in the accounts receivable that was never paid. A 10 per cent amount for this allowance is not unusual. Multiply the current accounts receivable by 10 per cent and write off this amount as an allowance or percentage of receivables that will probably not be paid.
You do this in the same way you wrote off the bad debt earlier. Open the "Make General Journal Entries" window. Enter a credit for the correct percentage from the accounts receivable and an equal debit to the new "Allowance for Doubtful Accounts" expense. If your company has a great deal of customers with balances that would qualify to be put into a "bad debt" category, this method would be the fastest to employ.
There is always another way to accomplish the same task in QuickBooks. This is just one of the ways to handle the writing off of bad debt.