# How to write off bad debt

KB88

A bad debt is usually a Customer ’s account balance that they will never pay, which will be made up of one or more outstanding sales invoices. The reason why they aren’t paying is not relevant: the important thing is that you need to be able to cancel the invoice out and account for the loss. Because bad debts have been generated by Sales invoices for which you have already had to remit GST to the ATO, it is important that when you cancel out the debt, you also claim back the GST that you have paid. Bad debts are therefore best handled using a sales invoice credit (effectively, you are giving that customer a credit).

Note that this is only a recommended process and can be varied to achieve the same result.

### Process

1. Create a new Sales Invoice for the customer
   1. Add a line to the invoice representing a credit for the amount you are writing off.

   > 1. You can use the built-in item code “GLAccount”
   > 2. You can use a special item code that you might have created for this purpose, e.g. called BADDEBT

   1. Assign the G/L income account for the line to ensure that it is posting to an appropriate Bad Debts G/L account (check with your accountant if you are not sure)

   > 1. Click on the I button under the item code to assign the income account
   > 2. If you are using an item that has been created specifically for bad debts, then it will already have a G/L account allocated

   1. Use a qty of 1 and a negative amount representing the ex tax amount of the debt

   > 1. Be careful to ensure that the tax amount is the same as the tax that was charged on the invoices that are being written off

   1. Add plenty of notes to the data to ensure that you explain to yourself and others what the debt was and why it is being written off

2. Create a $0 receipt to pay off the bad debt(s) with this credit

> 1. For Receipt type, select Customer
> 2. Under Receipt details, select EFT
> 3. Allocate all invoices to be written off as well as the bad debt write-off credit invoice created above
> 4. The amount of the receipt and the total amount of allocated invoices must be $0
> 5. Update

Your bad debts have been erased and your Bad Debts G/L account now contains the amount that was written off.

- Never use the item code that was sold, because this will bring the item back into stock. You must use a non-stock item code
- Don’t use a Manual Journal to write off a bad debt: this will not cancel out the Trade Debtors ledger and will not allow you to claim back your GST
- If in doubt about this process or the result, always check with your accountant

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