Loans and Write-Offs in QuickBooks

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.

Why Enter Loans in QuickBooks? 

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.

How to Enter Loans in QuickBooks Online

To enter a loan using QuickBooks Online , you’ll need to set up a liability account to track the loan’s progress.

1. Choose “Settings” and “Chart of Accounts.” Then select “New” to make a new account
2. Choose “Long Term Liabilities” from the “Account Type” drop-down menu
3. Choose “Notes Payable” from the “Detail Type” menu
4. Give the loan account a relevant name. Be as specific as possible, so you always know which account you are dealing with, like, “Marketing Loan”
5. In the “Balance” field, enter the total amount in the account, as well as the “As Of” date. The As Of date tells QuickBooks when you want to start tracking the loan
6. Enter your loan’s full amount as a negative amount, which sets up a liability account with the full total of the loan in question
7. Choose “Save and Close”

If you want to record loan payments, you can follow these steps for accurate recording:

1. Choose “+New” then “Check”
2. If you plan to send a physical check to pay off some or all of the loan, add a relevant check number
3. If you want to use a direct withdrawal or an ETF, enter either of those options in the check number field instead
4. Then put the liability amount for your loan from the category drop-down menu and enter the payment amount
5. Choose the expense account for the interest from the same category drop-down menu and enter the interest amount
6. You can also add any additional fees that may apply
7. Choose “Save and Close” when you’re done

Entering Loans in QuickBooks Desktop

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:

1. Click “Banking” and “Write Checks” in the contextual menu
2. You can then enter the payee name and repayment amount in the applicable fields
3. Don’t forget to assign the interest element for your loan repayment
4. You can tell QuickBooks to enter the payment automatically at regular intervals (such as for monthly payments) if you click “Edit” and “Memorize Check”
5. Click “Save and Close” when you’re done

Why Write Off Debt in QuickBooks? 

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. 

Write-Offs Using QuickBooks Desktop

1. First, go to “Lists” and select “Chart of Accounts”
2. Choose “Account,” then “New”
3. Choose “Expense, then “Continue”
4. Enter a new account name. To keep things simple, named this something applicable like “Bad Debt” or “Debt Write-Offs”
5. Select “Save and Close”

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.

1. Go to “Customers” and choose “Receive Payments”
2. Enter the names of customers who aren’t paying you in the “Received From” field
3. Then enter the payment amount. Since you aren’t collecting any money, this has to be $0.00
4. Choose “Discounts and Credits”
5. Enter the amount you want to write off in the “Amount of Discount” field
6. Choose the account that you added in the first step of this process in the “Discount Account”
7. Choose “Done,” then “Save and Close”

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.

Write-Offs Using QuickBooks Online

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.

1. Go to “Reports”
2. Open an “Accounts Receivable Aging Detail” report
3. A list of outstanding Accounts Receivable will be there. Choose which ones you want to write off

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.

1. Go to “Settings” and choose “Products and Services”
2. Choose “New” and “Non-Inventory” in the upper right-hand corner of the screen
3. Enter “Bad Debts” in the name field
4. Choose “Bad Debts” from the income account drop-down menu
5. Choose “Save and Close”

At this point, you now need to create a credit memo for the bad debt, so it is recorded correctly.

1. Pick “+New,” then “Credit Memo”
2. Choose the customer from the customer drop-down menu
3. Choose “Bad Debts” from the “Product/Service” selection menu
4. Enter the amount you want to write off in the “Amount” column
5. Enter “Bad Debt” in the “message displayed on statement” box, then click “Save and Close”

Now that you’ve created a credit memo for the bad debt, you can apply the memo to the invoice(s) in question.

1. Select “New+”
2. Choose "receive payment" under the "Customers" drop-down menu, then choose the appropriate customer from the same menu
3. Choose the invoice you want to mark as bad debt from the “Outstanding Transactions” section
4. Choose the bad debt credit memo from the “Credits” section
5. Choose “Save and Close”

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. 

Summary

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