Bad debts are a reversal of the original sale, where the transaction gets allocated to a bad debts expense account.
Setting up your Accounts List to record a bad debt
Creating a Bad Debts expense account is the only preparation needed for recording bad debts. Or, if your account for bad debts by posting a provision to an asset account, create a 'Provision for Bad Debts' asset account instead. Check with your accountant if you're unsure.
Applying bad debt to a customer
A bad debt is applied to a customer's account by first creating a credit note (Adjustment Note). This bad debt Adjustment Note is then applied to the customer's outstanding invoice(s).
1. Go to the Sales module and click Enter Sales.
2. Select the Customer and enter the transaction details including the Invoice Number and Date.
3. Click the Layout button and choose the Service layout, then click OK.
- Enter an appropriate Description such as "Write off bad debt".
- Select the Bad Debts account in the Acct# field. When you do, you will receive a warning message that says that the account used to allocate a sale is usually an income account. Disregard this message and, if applicable, click OK.
- In the Amount field, enter a negative value equal to the bad debt amount.
- Apply the relevant tax/GSTcode. You may need to reference the original invoice(s) to determine which tax/GST code to use.
- Click Record.
.To apply the bad debt to the Sales, you can refer to our earlier post How to Apply Credit Note to Sales.