How do I write off bad debt in QuickBooks Online (QBO)?
Bad debt, or irrecoverable receivable, is an outstanding amount a customer (or a seller) cannot repay. It could be due to bankruptcy (or insolvency) or a dispute between the seller and buyer over goods and services.
Bad debt is an expense. Assuming your customer owes you money, and after chasing the payment for some time and still unable to recover the amount owed, you decide to write it off as bad debt. In this case, you must move the outstanding amount from the receivable account to the bad debt expense account by passing a journal to:
Debit bad debt expense
Credit accounts receivable
Then, go to the receive payment transaction to offset the outstanding invoices with the bad debt journal.
You can claim the GST output tax if you qualify for bad debt relief. Check with IRAS or your accountant if you need to claim for bad debt relief.
Bad debt is different from a provision for doubtful debt. Bad debt is an expense already incurred, which you deduct from the receivable (write off the outstanding invoice). Whereas provision for doubtful debt is estimated, you foresee writing off within the financial year. A provision for doubtful debt is a contra-asset account that reduces the receivable amount. The account type can be a current assets account, and the detail type uses allowance for bad debts, which is available in QuickBooks Online (QBO).
In preparing the provision for doubtful debts, you use a journal to:
Debit bad debt
Credit provision for doubtful debts
Then:
Debit provision for doubtful debts
Credit accounts receivable
When realised the doubtful debt.
If you prefer the provision for doubtful debts to appear below your receivable account in the balance sheet, you can create it as a trade and receivable type instead of a current asset. You have to tag the account with a dummy debtor when using it in a journal, and it shows in the ageing report as a negative value.