Rustler’s Quickbooks Tips

Inevitably, this not being a perfect world, you will come across a dead beat who does not pay his debts. The IRS and what accounting standards I can find all say that you should not make the determination that a debt is a bad debt until you have exhausted all the ways of collecting it - judgment decision. But when that happens you will need to create an expense account called something like “Bad debt expense” and set up an “Other Charge” item called Bad-debt which points to the bad debt expense account. If you normally sell and collect sales tax make the Other Charge item taxable.

Bring up the customer center and use the drop down arrow by the button that says New Transactions and select Create Credit memos/refunds, that opens a window. Fill in all the fields, under item use the Bad-debt item. Remember that if the customer pays sales tax, you need to enter the amount less sales tax, then QB will calculate the sales tax on the amount.

Then save and close the credit memo, when you do that QB will ask you what you want to do - select apply to an invoice, then select the invoice it applies to. When you do the invoice will be marked closed, the amount will be removed from accounts receivable, the sales tax amount will be removed from the sales tax payable account, and the bad-debt expense account will show an increase.

Since you did not get whatever you sold back, there is no entry made to inventory or cost of goods sold.