How to Write Off Bad Debt in QuickBooks
We've had quite a few readers write to us to complain that their year end cash basis Balance Sheets and Trial Balances were out of balance. When we asked them to search for a transaction in an amount equal to the difference, all of them replied that the amount was a bad debt write-off. All of them said they followed the instructions in the QuickBooks Help Files to write off the unpaid amount as a bad debt. All of them also told us that their accountants told them to use a bad debt write-off (accountants who advertise themselves as supporting QuickBooks should know better, but unfortunately we hear about these things quite often).
If you report on cash basis instead of accrual, there's not really any such thing as a bad debt. After all, you don't recognize the income from the unpaid invoice, so if the income doesn't exist how can you have a bad debt?
The QuickBooks Help files outline the correct steps for posting a bad debt; however, they should contain text that warns you that you cannot take these steps if your business is cash-based (perhaps that text should be bold, or in color, or flashing on your screen – anything to get your attention).
Editor's Note: Help files in recent versions of QuickBooks contain a "Bad Debt Overview" that does mention (but without emphasis or further explanation) accrual accounting. If you want to write off an unpaid receivable in a cash based business, create a Credit Memo and apply it to the unpaid invoice(s). You also have to void the transaction you created to apply the balance as a bad debt. To accomplish this, open the account register for the expense account you created for bad debts, void the transaction(s) and then delete that account.