Credit Memo or Bad Debt Writeoff?

Your accountant advised you post a credit memo against the customers receivable, that makes sense. What account(s) did your CPA tell you to code the credit to?

Credit memos are a METHOD for zeroing out an invoice (another method might be a general ledger entry, or a statement charge in the customer register). The accounts affected by the Credit memo are determined by the items you specify. Create an item that points to a 'Bad Debt' account.

As to the COGS, I am not sure how that is influenced by 'Bad Debt'. I thought COGS was a concept reserved for inventory.

Ah - good point. He never told me and I never asked, as I brought this topic up as a side note...Thanks Allan. I should not have assumed that it posted to accounts receivable. I'll give him a call.

It will always post a credit to accounts receivable its the debit of the entry that is your concern.

Yep. An inventory item debiting Bad Debt Expense and issue credit using that item. You'll credit A/R and debit Bad Debts -- just what you want.

NOT an Inventory item. Probably Other Charge, although Non-Inventory or Service would also work.

Non-accountant contractor here, but how does not getting paid for a job affect your COGS? Your cost is the same regardless.

If you're cash basis, the income wasn't ever recorded since it wasn't paid so the credit memo just clears the bad debt off your record.

I'd say not gett>I'd like to get some opinions on more of an accounting issue than a QB

I suspect that your accountant has you on the cash method rather than the accrual method. The bad debt account is really more of an artificial construct that is just used in accrual based accounting. Under the cash method for tax purposes, you don't recognize income until you actually get money for the work, no matter what your accounts receivable says. So, if you never received the money, then you never had income, so you never had bad debt. As your CPA suggests, it is best to write a credit memo. On the cash basis, it actually shouldn't affect your P&L (you never had profit from this invoice in the first place).

Artificial my ass, its been a long time since I've been stiffed but it was quite real to me at the time.

And why wouldn't it affect your P&L. It may not have made a profit, but, if there were expenses involved (surely there were) it certainly should show as a loss.

On the cash basis, it would not count towards income. Since the cash was never received, there is no income. So not receiving the cash doesn't affect the P&L. Only receiving the cash does. The expenses are the expenses when incurred, regardless of whether you received the income associated with them or not.

On the accrual basis, the income is recognized when the service is completed and billed. In that case you have to count it as income, even if you haven't received the cash. You have to pay taxes on it, even though you don't receive the cash. That's the beauty of being on the cash method for most small businesses. You don't have to pay taxes unless you actually receive the cash. But, technically from an accounting standpoint, you can only have bad debt if you had income to begin with, so the bad debt account is only used when using the accrual basis.

To make a long story short, the term 'bad debt' has a very specific definition within accounting.

Of course, if you are aren't getting paid for work you have done, it still feels bad.