USA Bad Debt Expense & Cash Basis P&L

[Abond]

Throughout the year, I've been cleaning up our A/R in our Quickbooks Enterprise file. We've deemed some of our unpaid A/R invoice balances as uncollectible funds. For this case, I've created a Bad Debt Expense account that appears with our operating expenses. I use this account when creating Credit Memos. I then apply the Bad Debt Credit Memo to the invoice. This clears the unpaid balance and records the bad debt in an obvious manner.

We report on cash basis. So, our accountant uses our income and expenses from our cash basis P&L to file our taxes. I realize as a cash basis corporation, we cannot write-off bad debt expense. We are solely using this account to keep track of how much we're crediting to these old invoices.

My problem is - I don't understand why the bad debt expense account (with these credit memos) shows up on my cash basis P&L? I always thought the cash basis P&L only reflected real money coming in and going out. Is this normal?

Any insight is much appreciated.

 

[Drmdcpa]

When you create a credit memo you are creating the deduction as if the invoice was paid. A credit memo in QB is when the customer pays. What I do for uncollectible invoices is to open the invoice and put a credit line item on it to remove any balance not to be paid. This zeroes out the invoice. And on the rare occasion that I do collect, I can open the invoice and remove the credit line item to restore the invoice.

 

[Abond]

When you create a credit memo you are creating the deduction as if the invoice was paid. A credit memo in QB is when the customer pays. What I do for uncollectible invoices is to open the invoice and put a credit line item on it to remove any balance not to be paid. This zeroes out the invoice. And on the rare occasion that I do collect, I can open the invoice and remove the credit line item to restore the invoice.

Thank you. Does that mean what I’ve done is incorrect? I’ve been doing it this way for a year, so to go back and change it would be a nightmare. I’m just curious as to why credit memos show up on a cash basis P&L. It seems odd since it’s not real money. When we do our taxes can’t we simply leave it out so that it isn’t reducing our profit?

 

[Drmdcpa]

As indicated, the reason it is showing up as it is, is because what you are doing. Do you know what GIGO is? It stands for garbage in, garbage out. That means if you do incorrect data entry, you will get useless reports or results.

I am not sure I would got through the trouble of reversing the old transactions. Your accountant should be able to make an adjustment. But going forward, I would stop issuing credit memos.

The way I do it sometimes results in a line item on the profit and loss cash basis. It shows up as negative revenue. But it only seems to happen this way when I cross time periods. For example creating the invoice in year one and zeroing it out in year two. Not sure why it impacts the cash basis report. I have just chalked it up to a QuickBooks quirk.

 

[Abond]

Thank you. Unfortunately, that’s what this is... uncollectible funds from previous years that were never cleaned up. I guess either way it’s going to appear on my cash P&L.