Writing Off Unpaid Invoices (Bad Debt) in QuickBooks Online – USA
Writing off an unpaid invoice (bad debt) in QuickBooks Online should be done correctly to ensure:
- Your Profit & Loss shows bad debt expense
- The customer’s balance becomes zero
- Your Accounts Receivable aging report is accurate
- No bank reconciliation is affected
Step 1 Create a Bad Debt Expense Account (one-time setup)
Go to Settings → Chart of Accounts → New and use the following settings:
- Account Type: Expenses
- Detail Type: Bad Debts
- Name: Bad Debt Expense
This account will be used to write off unpaid invoices.
Step 2 Create a “Bad Debt” Product/Service (one-time setup)
Go to Settings → Products & Services → New and set up:
- Name: Bad Debt Write-Off
- Type: Non-inventory
- Income account: Bad Debt Expense (created in Step 1)
- Tax: Nontaxable
This service line allows you to write off invoices properly.
Step 3 Create a Credit Memo to Write Off the Invoice
Go to + New → Credit Memo and enter:
- Customer: Select the customer who will not pay
- Product/Service: Bad Debt Write-Off
- Amount: The amount to write off
- Message: “Invoice #1234 written off as bad debt”
Save and close.
Step 4 Apply the Credit Memo to the Invoice
Go to + New → Receive Payment and select:
- Customer: Select the customer
- Select both the unpaid invoice and the credit memo
The ending balance must be zero. Save the transaction.
Result
- Invoice is closed
- Customer balance is zero
- Accounts Receivable aging report is clean
- Your books show a Bad Debt Expense
Why This Method Works Best
- Does not delete the invoice
- Creates a proper audit trail
- You can still see the original sale
- Expense appears on the Profit & Loss statement
- Customer’s history remains intact
Common Mistakes to Avoid
- Deleting the invoice: ruins A/R history and changes prior period financials
- Using a discount to zero out the invoice: lowers revenue incorrectly and hides real bad debt
- Coding to an equity account: causes unbalanced books and inaccurate tax reports
- Journaling against Accounts Receivable: messy, only for advanced accountants
Bonus: Recovering a Bad Debt if the Customer Later Pays
Record the payment as normal, but categorize it to Other Income → Bad Debt Recovery.