How to handle when a customer has an overpayment in account balance and goes out of business

Accounting treatment in QuickBooks is exactly the same like when Vendor goes out of business prior to payment for the open balance.

If the vendor (or customer with a credit balance) goes out of business due to bankruptcy, keep it until you hear from the courts with instructions as to where to forward your payment.

In case, you do not hear from the courts (depending upon regulations in your state, you may have to leave it on the books for several years, in many states for up to 5 years), you will reverse the entry by creating a credit memo and take it as income like the one-time gain to your P&L.

If you are really interested in clearing A/P or A/R (negative balance), you can also set it up as holding liability account on your Balance Sheet.

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