Sales Taxes

Managing Bad Debt, Sales Tax, and Journal Entries in QuickBooks Online

When handling complex accounting tasks like writing off bad debt or managing sales tax adjustments, it is important to use the correct workflows to ensure your reports remain accurate. QuickBooks Online automates much of this process, but manual entries can sometimes disrupt your data.

Writing off bad debt

To accurately write off bad debt, we recommend using a credit memo rather than a journal entry. This method maintains the link to the original customer and invoice, ensuring your Accounts Receivable (A/R) aging reports remain accurate.

Why use a credit memo instead of a journal entry?

• Better Control: A credit memo allows you to link the write-off directly to the specific invoice.
• Sales Tax Handling: If sales tax was collected on the original invoice, the credit memo correctly reverses the tax liability.
• Audit Trail: It keeps the transaction history attached to the customer record, whereas a journal entry does not.

Steps to write off bad debt:

1. Go to the Settings gear icon and select Chart of Accounts.
2. Verify you have an account for bad debt (usually an expense account). If not, create one.
3. Go to the + New button and select Credit memo.
4. Select the Customer you are writing off the debt for.
5. In the Product/Service column, select the item used for bad debt (you may need to create a service item mapped to your bad debt expense account).
6. Enter the Amount you are writing off.
7. In the Message displayed on statement box, enter “Bad Debt Write-off.”
8. Select Save and close.
9. Apply the credit memo to the open invoice:
   • Select Receive Payment from the + New menu.
   • Select the Customer.
   • In the Outstanding Transactions section, select both the open invoice and the credit memo.
   • The payment amount should show as $0.00.
   • Select Save and close.

Using Journal Entries correctly

While journal entries are powerful, they should not be used for every transaction. In QuickBooks Online, we advise against using journal entries for the following:

• Accounts Receivable (A/R) transactions: Journal entries do not appear on A/R aging reports and cannot be applied to specific invoices.
• Accounts Payable (A/P) transactions: They do not update vendor balances or bill payment histories.
• Payroll: Always use the built-in payroll features to ensure tax forms and liabilities are calculated correctly.
• Inventory: Use standard sales and purchase forms to track quantity and value accurately.

If you must use a journal entry (for example, to record an allowance for doubtful accounts at the end of the year), ensure you are posting to the correct account types (e.g., debiting an expense account and crediting an asset account).

Adjusting sales tax and previous invoices

Changing an invoice from a previous period affects your current financial data. Because QuickBooks Online is accrual-based, modifying an invoice date or amount updates sales reports, tax liabilities, and balances for the period in which the change is made. This adjustment carries forward to subsequent reports.

Paying Sales Tax (GST/HST) QuickBooks Online calculates your total tax due automatically when you use the tax rate dropdown on transactions.

• How it works: When you select a tax code in the Sales tax section of an invoice or expense, QuickBooks tracks the liability in the appropriate tax payable account.
• Manual entries: If you manually calculate tax or post it directly to a tax liability account using a journal entry or a line item, QuickBooks cannot report on this correctly in the Sales Tax Center.
• Troubleshooting: If your sales tax total seems incorrect, review the transactions to ensure the correct tax rate was selected from the dropdown, not manually typed. If you have many manual entries that need correction, we recommend consulting your accountant before filing your return.