Recording bad debt expense

If you’re in business long enough, there will come a time when a customer is unable or unwilling to pay you. If you use cash basis accounting, you don’t need to record bad debt expense because you don’t have accounts receivable. However, if you do extend credit to your customers and, after attempting to collect the payment, you become aware that you will not be able to collect payment, you should write off the bad debt. This will ensure that your financial statements remain accurate and that revenue is not overstated.

There are three steps you need to follow in order to write off bad debt: first, you need to add a bad debt item to the products and services list; next, you need to create a credit memo; and finally, you need to apply the credit memo to the unpaid customer invoice. We will walk you through these steps in this section.

Creating a bad debt item

The first step of recording bad debt expense is to add an item to...