This article discusses the Direct and Allowance Methods for handling bad debts in accounting. The Direct Method posts bad debts as they occur, while the Allowance Method estimates and adjusts bad debts based on receivables at year-end. Most companies prefer the Direct Method. Consult an accountant to choose the best approach for your company.

Direct method

1. Select Options, then Global.
2. Uncheck Accounts Receivable under Hide General Ledger Accounts.
3. Select OK.
4. Create a Bad Debt Expense account, with the Account Type set to Expense. See How to create general ledger (GL) accounts.
5. Select Tasks, then Receive Money.
6. Select the relevant Customer ID.
7. Enter a unique Check/Reference No.
8. Enter the Date of the write-off.
9. Change the Cash Account to the Bad Debt Expense account.
10. On the Apply to Invoices tab, check Pay on the invoices being written off.
11. Select Save. This receipt will increase the balance of the Bad Debt Expense account (debit), and decrease the balance of the Accounts Receivable account (credit).

 TIP: Be sure to change the Cash Account back to the standard account on the next receipt. 

Allowance method

1. Account setup

1. Select Options, then Global.
2. Uncheck Accounts Receivable under Hide General Ledger Accounts.
3. Select OK.
4. Create a Bad Debt Expense account, with the Account Type of Expense, and Allowance for Doubtful Accounts account, with Account Type of Other Current Assets. See How to create general ledger (GL) accounts.
5. Select Tasks, then General Journal Entry.
6. Enter the Date:
   • If estimating annually, this should be the first day of the fiscal year
   • If estimating on a periodic basis, this should be the first day of the relevant time frame
7. Enter a unique Reference.
8. On the first line, select the GL Account ID for the Bad Debt Expense account.
9. Enter a Description, if desired.
10. In the Debit column, enter the estimated amount of bad debt.
11. On the second line, select the GL Account ID for the Allowance for Doubtful Accounts account.
12. Enter a Description, if desired.
13. In the Credit column, enter the same amount.
14. Select Save.
15. Close General Journal Entry.

2. Write off invoices

1. Select Tasks, then Receive Money.
2. Select the relevant Customer ID.
3. Enter a unique Check/Reference No.
4. Enter the Date of the write-off.
5. Change the Cash Account to the Allowance for Doubtful Accounts account.
6. On the Apply to Invoices tab, check Pay on the invoices being written off.
7. Select Save; this receipt will increase (towards $0) the balance of the Allowance for Doubtful Accounts account (debit), and decrease the balance of the Accounts Receivable account (credit).

 TIP: Once you’ve completed this transaction, be sure to change the Cash Account back to the appropriate GL account. 

Adjust balances at fiscal year/estimation period end

1. At the end of the period used to estimate the bad debt expense, find the current balance of the Allowance for Doubtful Accounts account.
2. Select Tasks, then General Journal Entry.
3. Enter the Date:
   • If estimating annually, this should be the last day of the fiscal year
   • If estimating on a periodic basis, this should be the last day of the relevant time frame
4. Enter a unique Reference.
5. On the first line, select the GL Account ID for the Bad Debt Expense account.
6. Enter a Description, if desired.
7. In the Credit column, enter the amount of the remaining balance in the Allowance for Doubtful Accounts account.
8. On the second line, select the GL Account ID for the Allowance for Doubtful Accounts account.
9. Enter a Description, if desired.
10. In the Debit column, enter the same amount.
11. Select Save.

General ledger (GL) account field is missing on task windows