Bad debt is an amount that is owed to your organization that is not going to be paid by the customer for one reason or another. You can now close out your receivable with an expense account. This will allow you to track any income that was received, but then also track the expense for the unpaid difference. Examples might be tuition, membership dues, or a service performed by your nonprofit.
Using Your Expense Account in Accounts Receivable
You can create an expense account for this type of situation from your Chart of Accounts. You might call this expense account Bad Debt, or Allowance for Doubtful Accounts. The name of this account is up to your organization. Within the Expense section of your Chart of Accounts, click the + button on the account group that you’d like to add this account, assign a number and name, then Save.
Posting a negative amount in Accounts Receivable:
Now that you have your account created, you can use it to close out any receivables that you are not expecting to receive payment on. It is up to your organization to decide when you decide to mark these unpaid receivables as bad debt. You will go into your Accounts Receivable module and scroll down to the Receive Payments section. You’ll first need to edit your original receivable to change the amount and also split the it between your income account and the expense account for bad debt. To do this, click on the Due Date, which will make the receivable available to editing.
Once your receivable is open in edit mode, you will edit the Amount of the invoice to only the amount received, and also split the original invoice to count the unpaid amount to your expense account for bad debt.
Closing out your Receivable:
In the case from the example above, you have a receivable for $1000 and only $200 was received. You will edit the amount of the receivable to $200, then split it so that the original billed amount of $1000 is counted as income, and the remaining $800 is counted as a negative amount to your expense, netting the two amounts to $200. See example below:
After you click Submit to commit these changes, you will now see that this invoice shows in the History (Closed/Fully Received) section of your receivables module.
If you have any questions about this process, please feel free to reach out to our Customer Success team. We’re always happy to help!