You wouldn’t reward a customer who failed to pay you by discounting their entire balance would you? So why would you record it that way when the time came to write off a customer’s balance in QuickBooks?
The temptation might be to post a discount on the customer’s invoice to reduce that invoice’s balance to zero. This works in theory, but here’s the problem with that. Ultimately as you create your set of books you are leaving a trail of crumbs for someone else to pick up on and look at later. It may be the person preparing your taxes and it may be someone looking to buy the company who’s books you are compiling as you do the bookkeeping each day. So it is really important to tell the right story. If I discount a customer’s invoice to zero that suggests that everything was ok and I decided for whatever reason to create some goodwill by giving that customer a discount. This paints a very different picture compare with when I am writing off a customer’s balance as Bad Debt because they chose not to pay.
So the correct way to handle this transaction in proper context is to record a journal entry and write the balance off as Bad debt. In QuickBooks it is simple and the video tutorial will demonstrate how to do this. First here is a screen shot of what it looks like in QuickBooks:
Then you have to apply the credit produced by going into Customer Payments and applying the credit of $13,500 for this customer.
Click the TV to watch a video that goes over how to do this step by step:
I am new to Quickbooks, and I am trying to setup our chart of accounts to address this issue of “write-offs”. I follow and agree with the above, however, the problem is that the “bad debt expense” will show-up on the P&L statement as a loss which is not completely correct (we are a cash method) since we never recieved the profit? Can I make it a “negative equity” account effectively reducing the retained earnings?
I also am having an issue at the “opposite end”, when a client gives us a deposit/retainer and/or overpayment giving them a credit. It appears that Quickbooks handles this by a “negative account recievable” rather than creating a current liability account. I have read about “creating an invoice” or making a journal entry, etc. but this appears to be just more accounting manipulation and since this would effectively cancel the customers credit it requires us to remember it when we actually go to bill for the work completed. Am I missing a simplier solution?
Thank You
What will happen when you write off the bad debt expense is that you will apply the resulting credit to the invoice. That will cause the income to be picked up and of course as you pointed out the expense will hit the books so it will be a wash. This is the proper accounting treatment. Bad debt is an expense.
I have another video on here, in fact several on customer deposits. This one walks you through how to handle it. It is a few steps if you don’t want the negative receivable on your books, and if you want nice clean books then in my opinion, it’s worth it. I also have a full length version of this in my knowledge store that walks you through how to set up the reporting infrastructure so that when you are using this method it becomes easy to run the reports while you are recording payments from clients as well as invoices to clients so you can quickly and easily see and post the necessary entries to pull from the liability account and apply it to the Accounts Receivable.
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Here is the full length video I have on this in my Knowledge Store:
Customer Deposits and Mastering Accounts Receivable
We have been using Quickbooks for awhile now, but haven’t done much besides what we need to for our company. One issue that I have is Tips. Customers will sometimes give our employees a tip that we will have to record in Quickbooks (because it was on a check or cash that wasn’t split) but they stay as a negative balance in our customer records. How do I get the negative balances to disappear without throwing everything off? Thanks!
Good question! Since the amount is included on the customer balance and was included in what the customer paid you, the amount really is a liability because you are collecting this against what has to be paid out to the employee. I am assuming that the tips are paid out in cash on the same night, so here is how I would do it..
1) Set up an item in your item list called “Tips” – map the item to a liability account. Call it “Tips Payable”
2) If you have a petty cash account on the books to describe expenses you’ve paid cash for then just write a check out of that account for the total in the liability account. Write the check to that liability account and it will zero out. OR just book a journal entry – Debit Tips Payable, Credit Owner contributions (since paying them out in cash is like paying them out of your own pocket. You also have to consider how you deal with the cash when you actually paid it out. If you are taking the cash out of your register to pay them out then the registers will be short. So how is that accounted for in QuickBooks? That should give you a clue about what account to “Credit” in the journal entry because the shortfall should theoretically wash with the tips you paid out.
Hope that helps!