QuickBooks is a versatile and flexible software that allows you to accomplish most major accounting tasks whether you have lots of experience or are a first-time business owner doing everything yourself. However, some of QuickBooks’s tutorials can be a bit tricky to grasp, especially when it comes to entering loans and making payments or writing off bad business debt. With this in mind, the below guide will break down why you should enter loans and write off bad debt using QuickBooks, plus go over how to do both processes in detail.
All businesses occasionally need to borrow money, whether it’s for expansion, paying off earlier debt, or preparing for a big marketing push. You should enter any loan your business takes out as a liability in your accounts, plus record the loan payments you make to reduce that liability. This helps you to keep better track of your business expenses and ensures you can keep your debt payments on track relative to the rest of your business budget. It’s just good accounting and one of the primary things QuickBooks was made for the first place. QuickBooks has slightly different loan entering processes depending on whether you use the online or desktop version of the software.
To enter a loan using QuickBooks Online , you’ll need to set up a liability account to track the loan’s progress.
If you want to record loan payments, you can follow these steps for accurate recording:
Entering loans in QuickBooks Desktop is very similar. You’ll need to make a loan account as described above, then follow a slightly different process:
From time to time, a business may end up taking on so-called “bad debt.” Bad debt is any debt that a customer legally owes you but can’t pay. If you can’t collect this debt, it represents a drag on your bottom line and can impact your profitability when you enter it into your accounting software. However, your business may also use the accrual method of accounting. With accrual method accounting, your business will report any income and expenses for both completed and pending transactions (i.e., you report your transactions in both accounts payable and accounts receivable). QuickBooks allows you to use the accrual method with its versatile tools. If this is the case, you can write off bad debt as deductions on your taxes in many cases, so you end up owing the federal government less money than you would otherwise. But in order to take advantage of this tax write-off, you have to record the invoices you send in QuickBooks as “uncollectible”. This helps your net income stay up-to-date and balances your accounts receivable. As with writing loans using QuickBooks, there are two different processes in which to write off debt : one process for desktop users and one for QuickBooks Online users.
At this point, you have added a new expense account to track all bad debt for your business. Now you need to close the unpaid invoices recorded in your QuickBooks account.
There you have it! You’ve made a new account to handle any unpaid debts and have recorded the transactions as uncollectible in your QuickBooks account.
QuickBooks Online has a similar process to the one you’d use with the desktop version of the software. You’ll have to review the receivables or invoices that you want to consider as bad debt to start.
You should create a bad debt expense account as detailed in the desktop version of the process above. For QuickBooks Online, the buttons you need to press should be the same as desktop. Once you have created a bad debts-specific expense account, you can create a new and non-inventory item to be a placeholder for your bad debt. This doesn’t count as a true item in your business’s inventory but is needed to balance the accounting process.
At this point, you now need to create a credit memo for the bad debt, so it is recorded correctly.
Now that you’ve created a credit memo for the bad debt, you can apply the memo to the invoice(s) in question.
Your uncollectible payment receivable should now appear under the Profit and Loss Report for your Bad Debts expense account. Want to review all of the receivables you’ve marked as a bad debt so far? You can do this using QuickBooks Online by going to “Settings,” then “Chart of Accounts,” then selecting “Run Report” in the “Action” column of your bad debts account.
Even though it can get a bit complex from time to time, QuickBooks’s loan entering and debt write-off processes are useful and pretty quick to perform once you get the hang of them. Of course, the more you use QuickBooks , the more comfortable you’ll be with its controls and the easier it’ll be to keep track of your expenses. At Seek Capital’s blog, you can find a variety of other QuickBooks guides, plus learn how to secure financing for your business . Contact us today and see how we can help you accomplish your goals! Sources: Topic No. 453 Bad Debt Deduction | IRS.gov Set up a loan in QuickBooks Online | QuickBooks Write off bad debt in QuickBooks Desktop | QuickBooks