How to write off a customer unpaid invoice as bad debt expense?

When a Customer Invoice becomes non-collectible, you will generally write it off as bad debt expense. You will create a credit memo to clear Accounts Receivable (A/R) balance and that will hit the P&L during that accounting period.

You will need to take the following steps in QuickBooks:

Step 1: Create Bad Debts Expense Account (COA)
1 create bad debts expense account

Step2: Create Bad Debts as Product/Service Item
2 create bad debts item

Step3: Create Customer Credit Memo
3 credit memo

In addition, if you want to automatically apply credit memo against open A/R balance, you will need to change the company gear and take the following steps:

From the home page screen:

  • Company Gear (upper right corner)
  • Settings
  • Company Settings
  • Advanced
  • Automation
  • Automatically apply credits
  • ON
  • Done

6 automatically apply receipts
If this setting is off, you will need to select Receive Payment. That will be step #4. This will clear both invoice balance and credit memo and will show zero balance after that.

To create a new bad debts expense (step#1):
From the home page screen:

  • Company Gear (upper right corner)
  • Settings
  • Chart of Accounts
  • New (blue button upper right corner)
  • Category Type = Expenses
  • Detail Type = Bad Debts
  • Name = Bad Debts
  • Description = Bad Debts Expense
  • Save

To create a new bad debts as product/service item (step#2):
From the home page screen:

  • Company Gear (upper right corner)
  • Lists
  • Products and Services
  • New (blue button upper right corner)
  • Name = Bad Debts
  • Description = Bad Debts
  • Income Account = Bad Debts
  • Uncheck “Is Taxable” box
  • Save and Close

To create a customer credit memo (step#3):
From the home page screen:

  • Create + Sign (top middle)
  • Customers
  • Credit Memo
  • Choose a customer
  • Product/Service = Bad Debts
  • Amount = Open invoice (or balance) write off amount
  • Memo = Indicate for record why needed to create this credit memo
  • Attachments (paper clip icon) = Attach all documents
  • Save and Close

4 customer page

5 bad debts expense

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How to write off a customer unpaid invoice as bad debt in QBO

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