How Do You Write Off Bad Debt in QuickBooks Online?

Writing off bad debt in QuickBooks Online means recording an uncollectable invoice as an expense so it stops showing as money owed to you. You create a bad debt expense account and item, then apply a credit memo to the unpaid invoice, which clears it from accounts receivable and books the loss. The process takes a few minutes.

The mechanics are the simple part. The judgement calls, deciding when a debt is truly bad and whether you can deduct it, matter more. This guide covers both the steps and the decisions around them.

Key takeaways

• Writing off bad debt clears an uncollectable invoice from accounts receivable and records it as an expense.
• It does not delete the original invoice; it offsets it with a credit memo.
• Cash-basis businesses generally cannot deduct bad debt, because the income was never recorded.
• Accrual-basis businesses can usually deduct a written-off receivable.
• Write off only after you've genuinely exhausted collection efforts, not the moment an invoice is late.

When a debt is actually bad

Not every unpaid invoice is bad debt. A late invoice is a collection problem. A bad debt is a receivable you've realistically given up on. Writing one off too early hides a customer who might still pay and understates your income.

Before you write anything off, confirm you've done the reasonable things: sent reminders, followed up, and given the customer a fair chance to pay. If the customer has disappeared, gone under, or simply refused after repeated attempts, the debt has crossed from late to uncollectable.

Your accounts receivable ageing report is the tool for this call. Invoices sitting in the 90-plus-day column, with no response to follow-ups, are the candidates. Review them deliberately rather than writing off anything that ages past a date.

The cash vs accrual rule most people miss

Here's the part the step-by-step guides skip, and it changes whether the write-off saves you any tax. Whether you can deduct bad debt depends on your accounting method.

If you use the accrual method, you recorded the income when you sent the invoice, before you were paid. When that invoice becomes uncollectable, you've effectively paid tax on income you never received, so you can generally write it off as a deduction to correct that.

If you use the cash method, you only record income when you actually receive it. Since you never recorded the income from an unpaid invoice, there's nothing to deduct.

You can still clear the invoice from your books for accuracy, but per the IRS bad debt rules, a cash-basis business usually can't take a deduction.

The difference between cash and accrual accounting is exactly what determines this, so confirm which method you're on before assuming a tax benefit.

How to write off bad debt in QuickBooks Online

The process uses a credit memo to offset the unpaid invoice. Follow these steps in order.

1. Identify the invoice. Review your accounts receivable ageing report and confirm which invoices are genuinely uncollectable.
2. Create a bad debt expense account. Go to Settings, then Chart of Accounts, select New, choose Expenses as the account type and Bad debts as the detail type, and name it Bad debts.
3. Create a bad debt item. Go to Settings, then Products and Services, select New, choose a non-inventory or service item named Bad debts, and link it to the bad debt expense account.
4. Create a credit memo. Select + New, then Credit Memo. Choose the customer, select the bad debts item, and enter the amount of the unpaid invoice.
5. Apply the credit to the invoice. Select + New, then Receive Payment. Choose the customer, select the outstanding invoice, and apply the credit memo against it.
6. Run a bad debt report. Open the bad debts account and run a QuickReport to see every receivable you've written off.

Once applied, the invoice shows as paid, your accounts receivable drops by the amount, and the loss lands in your bad debt expense account.

Direct write-off vs the allowance method

There are two accounting approaches to bad debt, and the steps above use the simpler one. Knowing the difference matters if you report under GAAP.

The direct write-off method records a bad debt as an expense at the moment you decide it's uncollectable. It's simple and it's what most small businesses use, but it can misalign the loss from the period the sale happened.

The allowance method estimates uncollectable debts in advance and sets aside a reserve, so the expense is matched to the same period as the related sales. Businesses that follow GAAP are expected to use it.

Our guide on bad debt expense methods and journal entries breaks down both approaches in detail.

What the write-off does to your books

The write-off touches two accounts and produces one clean result. Your accounts receivable decreases by the amount of the invoice, because you're no longer counting it as money owed to you.

At the same time, your bad debt expense increases by that amount, which reduces your net income for the period. The original invoice stays in your records rather than being deleted, so your history remains intact and auditable.

The overall effect is that your books stop overstating what you'll collect. A receivables balance full of invoices you'll never see is a balance sheet that lies to you, and clearing bad debt is how you keep it honest.

Preventing bad debt in the first place

Writing off bad debt is damage control. The better position is having less of it to write off, and that comes down to how you manage receivables.

Invoice promptly and with clear terms, follow up on overdue accounts on a schedule instead of when you remember, and watch your aging report so problems surface early.

A customer who's 30 days late is far more collectible than one who's 120 days late, so speed matters. Tightening this is the heart of good accounts receivable management.

The businesses with the least bad debt aren't luckier. They just see trouble sooner and act on it before an invoice ages into a loss.

Where automation helps

Bad debt is usually a symptom of receivables you didn't watch closely enough. When your books lag weeks behind, an invoice can quietly age past the point of collection before anyone notices.

Keeping receivables current changes that. When your ageing report reflects reality in real time, you catch a slipping account while it's still recoverable, not after it's a write-off. Automated categorisation and reconciliation are what keep the books current enough for that to work.

Finlens keeps your books close to real time on top of QuickBooks, so your receivables picture stays accurate and the accounts heading toward bad debt are visible while you can still do something about them.

Conclusion

Writing off bad debt in QuickBooks Online is a short process: create a bad debt expense account and item, apply a credit memo to the uncollectable invoice, and it clears from your receivables while the loss books to expense. The invoice stays in your records, so nothing is lost from your history.

The decisions around the process matter more than the clicks. Write off only after you've genuinely exhausted collection, not the moment an invoice is late, so you don't understate income or lose a customer who might still pay.

And know your accounting method before you count on a deduction. Accrual businesses can generally deduct a written-off receivable, while cash-basis businesses usually can't, because the income was never recorded.

Underneath it all, bad debt is a receivables problem more than a bookkeeping one. The write-off is how you clean up after it, but the real win is seeing accounts slip early and acting while they're still collectible.

Keep your invoices prompt, your follow-ups scheduled, and your ageing report current, and you'll write off far less. When you do have to write something off, do it deliberately, record it correctly, and check with your accountant on the tax side before you file.

Frequently asked questions

How do I write off bad debt in QuickBooks Online?

Create a bad debt expense account and a bad debt item linked to it. Then create a credit memo for the customer using that item for the unpaid amount, and apply the credit memo to the outstanding invoice through Receive Payment. This clears the invoice from receivables and records the loss as an expense.

Does writing off bad debt delete the invoice?

No. Writing off bad debt offsets the invoice with a credit memo rather than deleting it. The original invoice stays in your records for history and audit purposes, but it shows as paid, and the uncollectable amount moves to your bad debt expense account.

Can I deduct bad debt on my taxes?

It depends on your accounting method. Accrual-basis businesses recorded the income when they invoiced, so they can generally deduct a written-off receivable. Cash-basis businesses never recorded the income, so there's usually nothing to deduct. Confirm your method and check IRS rules or your accountant before claiming a deduction.

When should I write off bad debt?

Write it off only after you've genuinely exhausted collection efforts, sent reminders, followed up, and given the customer a fair chance to pay. Invoices well past 90 days with no response are candidates. Writing off too early hides a customer who might still pay and understates your income.

What is the difference between the direct write-off and allowance methods?

The direct write-off method records bad debt as an expense when you decide it's uncollectable. The allowance method estimates uncollectable debts in advance and reserves for them, matching the expense to the sale's period. Small businesses often use direct write-off; GAAP requires the allowance method.

What accounts does writing off bad debt affect?

It reduces accounts receivable by the invoice amount, since you're no longer counting it as owed to you, and it increases your bad debt expense by the same amount, which lowers your net income. The result is a balance sheet and income statement that reflect what you'll realistically collect.

How do I know which invoices are bad debt?

Review your accounts receivable ageing report, which groups unpaid invoices by how overdue they are. Focus on the oldest, typically 90-plus days, with no response to follow-ups. Confirm you've made reasonable collection attempts before deciding an invoice is truly uncollectable rather than just late.

Can I recover an invoice I wrote off if the customer pays later?

Yes. If a customer pays after you've written off their debt, you record the payment and reverse the write-off so your books reflect the recovered amount. This keeps your income accurate. Note that a recovered bad debt may also have tax implications, so document it clearly.