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How to write off a sales invoice to bad debt

Created on  | Last modified on 

Summary

How to record the write-off of a customer invoice when they haven't paid using Sage Accounting.

Description

You may need to write off outstanding invoices when you know that a customer will never pay the invoice. This could be due to a dispute or when the customer's company goes into liquidation.

To write off your customer’s invoice, create a credit note using the Bad Debts ledger account. This offsets the bad debt against your profit for the current financial year.

Cause

Reclaim VAT on bad debts

If you use the Standard VAT Scheme, you may be able to reclaim the VAT you’ve already paid to the Revenue.

You cannot reclaim VAT if you use the Cash Basis Scheme. This is because you only pay VAT when the customer pays their invoice. As the customer hasn’t paid you, there’s no VAT to reclaim.

Bad debt relief conditions

To reclaim VAT when using the Standard VAT Scheme, you must meet certain conditions.

For more information about these conditions and if you can reclaim bad debt, contact Revenue. Or visit their website www.revenue.ie

Resolution

Before you start

You need to ensure that you've got the correct visibility settings for the Bad Debts ledger account in your chart of accounts.

To check:

  1. Go to Settings, then Business Settings.
  2. Select Chart of Accounts.
  3. Select the Bad Debts ledger account.
  4. Go to the Visibility section.
    Ensure you've ticked the Sales - Invoice / Credit, Product / Services / Customer defaults option.
  5. Select Save.

Write off a sales invoice and reclaim VAT

Write off the invoice

Create a credit note in the following way if you use the Standard VAT scheme and want to reclaim VAT.

We recommend that you create the credit note using the following details

  • Ledger Account - choose Bad Debts (8100)
  • Net - Enter the gross value of the invoices you want to write off. As there is no VAT on the credit note, this ensures that the whole value gets off
  • VAT Rate - Choose No VAT

To clear the outstanding debt, make sure to match the credit to any outstanding invoices. For more information, read allocate invoices.

Reclaim the VAT

To reclaim VAT, you need to record a journal for the VAT amount.

This reduces your VAT liability on your next VAT return.

  1. From Adjustments, choose Journals, then New Journal.
  2. Enter the details such as reference and the date.
  3. Add the following lines

    Ledger Account Debit Credit Include on VAT Return?
    Bad Debts (8100) 0.00 Reclaim value Leave clear
    VAT on Purchases (2201) Reclaim value 0.00 Select the check box
  4. If required, add any additional details to the Description field.
  5. Click Save.

Write off a sales invoice and don't reclaim VAT

Create a credit note in the following way if you write off an invoice and cannot reclaim the VAT.

We recommend that you create the credit note using the following details

  • Ledger Account - choose Bad Debts (8100)
  • Net - Enter the net value of the invoices you want to write off. As there is no VAT on the credit note, this ensures that the whole value gets wrote off
  • VAT Rate - Choose the VAT rate used on the original invoice

To clear the outstanding debt, make sure to match the credit to any outstanding invoices. For more information, read allocate invoices.