Sometimes there are cases where a customer will be issued an invoice that they can't pay.
In such situations sometimes it's prudent to mark the invoice or specific line item in the invoice as bad debt.
This can be done by issuing a credit note for the invoice that contains a line item, which is marked as bad debt.
That way everything will be reconciled and additionally, it will be marked as bad debt.
In this article, we'll explain how you can do that.
Prerequisites for Recording Bad Debt
First, we will need to do set up some other things previous to the recording:
- You can set up a "Revenue Account" that's called "Bad Debt".
More on how to do that here.
- You can now set up a one-off billing plan, that has a 0 price and its account can be set to the one that we just created - "Bad Debt".
More on how to set up billing plans here.
How to Record Bad Debt
Now that we've completed all the preparations we can lay out all of the steps that need to be taken in order to record the bad debt.
Let's say that you've already issued an invoice to the customer and it's currently sitting with a status of overdue.
- The first step would be to create a one-off fee for the amount that you'd like to mark as bad debt:
- You have to set this fee's status to "Paid" so that we can later credit note it.
Note: You can record "partial" bad debt by issuing a fee that's only for part of the amount of the invoice.
It's not necessary for the fee to cover the whole amount of the invoice.
- You can then go to the invoice that you'd like to mark as bad debt and click the "Credit Note" button.
Note: You shouldn't enable the checkbox to allocate the credit note to the invoice, as we'll edit the credit note after its creation.
You can allocate it after every other step is completed.
- You should now go to the newly created credit note - if you navigate to the profile of the company to which it was issued you'll find it in the "Invoices" section.
- Now you can edit the credit note using the "Edit" button and you can de-select all line items.
You can then add the fee that we previously created using the "Add existing fee" button:
- Finally, after updating the credit note you can allocate it to the invoice that you're going to mark as bad debt using the "Allocate credit" button.
If you've followed all of the steps everything should be reconciled and no amounts should be due, both for the invoice and for the credit note.
Tracking bad debt
You can track the bad debt, that you've issued to customers by taking a look at the Projected Revenue Report.
There should be a separate line for the "Bad Debt" revenue account that denotes what's been marked as bad debt.
There's a total for the whole organization as well as an amount of bad debt per customer: