How to Write-off an Invoice to Bad Debt Expense
Our goal here is to close the balance on an open invoice that you have established as no longer collectible, therefore a loss or bad debt. Through this process, we'll be closing the invoice and recognizing a bad debt expense.
Before you proceed, please note that these steps are only necessary if your business is under Accrual Basis. If you're under Cash Basis, the unpaid invoice has no effect on your financial statements, and you would have no accounts receivables or bad debts.
Here are the steps:
Create a deposit transaction and apply it as a payment to the open invoice. The amount should equal the total uncollectible portion, most likely the balance remaining on the invoice.
Create an expense transaction with the same amount as the deposit, and categorize it as Bad Debt Expense. If you don't already have this expense category, simply go to Accounting > Chart of Accounts > Add a Custom Expense Category.
In your bank reconciliation for the affected period, simply add the same amount to the Total Deposits and Total Expenses portion. To elaborate further, let's say the open balance in the invoice is $200. These are the steps you would've taken:
Create a deposit of $200 and apply it to the open invoice
Create an expense for $200 and categorize it as a Bad Debt Expense
In your bank reconciliation's Total Deposits and Total Expenses, add $200. If Total Deposits were $1,000, it would not be $1,200. And if Total Expenses were $2,000, it would now be $2,200. This will not affect your bank's beginning and ending balances but is a necessary step to complete reconciliations.