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)
Step2: Create Bad Debts as Product/Service Item
Step3: Create Customer 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
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
WATCH AND LEARN VIDEO
How to write off a customer unpaid invoice as bad debt in QBO