When you decide to write off a bad debt, you need to reflect this in AccountEdge. This page explains how to do this so that the customer's outstanding balance is removed, your expenses are correctly updated, and any GST liability related to the sale is adjusted.
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 you account for bad debts by posting a provision to an asset account, create a 'Provision for Bad Debts' asset account instead. Note that a Bad Debts expense account may already exist in your software.
To create the new account:
- Go to the Accounts command centre and click Account List.
- Click the Expenses or Assets tab (as applicable) then click New.
- Give the account a unique number that suits your account list.
- Name the account 'Bad Debts' (if creating an Expense account) or 'Provision for Bad Debts' (if creating an Asset account).
- Click OK. See our Expense account example below.
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 outstanding invoice(s).
- Go to the Sales command centre and click Enter Sales. In BusinessBasics go to the Command Centres menu and choose Sales then choose Enter Invoices.
- Select the Customer and enter the transaction details including the Invoice Number and Date.
- 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 (the account created earlier in this support note). 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 code. You may need to reference the original invoice(s) to determine which tax code to use.
- Click Record.
The window below shows the creation of a bad debt Adjustment Note. Please note the negative amount.
The bad debt Adjustment Note is applied to the customer's account by using the Returns & Credits tab of the Sales Register.
- Go to the Sales command centre, click Sales Register and click the Returns and Credits tab.
- Click to highlight the bad debt Adjustment Note then click Apply to Sale (along the bottom of the window).
- In the Settle Returns and Credits window, in the Amount Applied column enter the amount for you want to apply (write-off) for each invoice listed.
- Click Record.
The window below shows the bad debt Adjustment Note being applied to two invoices.
Adjustment notes and categories
If you create an adjustment note with a category, you will not be able to apply it to a sales invoice unless that invoice has the same category applied to it.
Using the method described above, a bad debt won't affect the GST where the GST is reported on a cash basis. This is because GST collected is only reported once the payment has been received from the customer. Since the customer never paid the invoice, no GST would have been reported.
Australia: Using the method described above, the Adjustment Note will be included in your BAS for this period at G1.
New Zealand: This transaction will only affect GST if you report GST on a non-cash (Accrual) basis and the GST collected on the sale has already been reported and paid to the IRD before the bad debt is realised.