Bad Debt in cash basis report

You should check with your accountant as to whether or not you should be a cash or accrual basis. Any company that has an inventory should be on an accrual basis not a cash basis.

In a cash basis company there is no such thing as bad debt as I stated back in April. You never received the cash so you can not claim any income and therefore there is no loss.

There is in fact a loss if someone takes some of your inventory and does not pay for it.

Not in a cash basis company. Or at least you can't claim it.

If you have inventory, you have shrinkage.

Maybe you answer?

Laura wrote:

Your loss will be reflected in Cost of Goods Sold ("CGS"). Here's how it works: when you prepare your tax return, you will have a CGS section. CGS will be computed by taking your beginning inventory, adding Purchases, and deducting your Ending Inventory. If you have less ending inventory because of theft, your CGS will be higher. CGS is an expense that will be reflected in your Net Profit. Thus, you will get a tax benefit from the inventory shrinkage by virtue of your CGS being higher, resulting in your taxable profit being lower.

And, companies that have Inventory are required to be on the accrual basis, as least with respect to accounting for their inventory.

The uncollected sales proceeds are not deductable, however all other costs incurred like the cost of the items sold are.

So the question becomes: how best to work within Quickbooks to properly record the bad debt so that that the cost of the lost inventory shows up in the correct account on a cash basis report.

Please refer to my prior response. In short, the lost inventory becomes an element of CGS, which reduces profit. This is the case regardless of whether the cash or accrual basis is used. Clear?

The concept is clear enough.... I'm referring to the mechanics of making the entries in QB so that the debt is cancelled and the lost inventory is accounted for.

For accounting purposes, it is:

Debit "Ending Inventory" (B/S) Credit "Ending Inventory" (P&L)

If you are running a perpetual inventory system through QuickBooks, I cannot assist, as I am not familiar with that module. Possible someone else can jump in and help.

or in other words...

however you record the sale when you ship to customer, you would reverse via journal entry, for example: Sale: Debit AR, Credit Inventory Payment received: Debit Cash, Credit AR No payment received: Debit Materials (P&L), Credit AR

Also, keep in mind that it would only be the cost of the inventory item, not the sales price that would be recorded.

Hope that helps. Denise