For example, we issued an invoice for Tuition Fee $1,000. The student paid $400. And has a balance of $600 + all the late charges. However, after 2 years, the student left the school with the upstanding. How to write-off an invoice that had partial payment against it?
Normal procedure would be to establish an expense account Bad debts, or something similar. Then make a journal entry:
Dr: Bad debts
Cr: Accounts receivable => Customer => Invoice #
Both debit and credit should be in the amount owed. Actually, you could even leave the invoice number blank. Assuming you are using accrual basis accounting, the appropriate date for the journal entry would be the day you made the decision the debt was uncollectible. There is no need to retroactively adjust income from previous accounting periods, when you properly assumed you would be paid. If the expected income was taxed in the year the sales invoice was first entered, you will now recover by having higher expenses this year.
This procedure assumes you have not maintained a Provision for bad debts account all along, as some companies do, assuming a small portion of their sales invoices will be uncollectible.
Thanks Tut. How about those invoices that have been already paid in full but because they paid past the due date and incurred the late charges, it is the same procedure you mentioned above or should we go through the invoices and edit the late charges to 0%?
I was afraid you would make things more complex. 
If you look at those sales invoices where the initial charge was paid but late fees were not, you will see they still have a balance due. So the late fees will be contributing to the Accounts receivable balance for that customer. As long as you make your journal entry for the full Accounts receivable balance, as shown on that customer’s line in the Customers tab, but leave the invoice number blank, Manager will automatically “pay off” any unpaid invoice, using the credit from the journal entry. The invoices will literally show as Paid in Full. If you drill down on the zero balance for the sales invoices affected, you will see an automatic payment using available credit.
Too slick for words, eh?
In place of a Journal, you could create a Credit Note to cancel out the unpaid late fees. For the account you could use the late fees income account or a bad debts accounts. The same processing point applies - leave the Invoice number blank.
@Brucanna’s idea will work, of course. I would think about two things before using it:
-
Do you otherwise need or use the Credit Notes tab? Once you use it, it will be there forever.
-
Is the issuance of a credit how you want to characterize the transaction that removes this bad debt from your books? You aren’t forgiving a debt; you are writing off a bad debt.
Well actually in this case you are. The late fee was imposed based on the failure to make timely payments.
It doesn’t relate to the provision of actual goods or services - which the customer has paid for, they have just rejected the imposition of the late payment surcharges. Therefore you are forgiving the payment of these administration based fees - as the account has been paid in full, albeit late.
Bad debts are more in tune with Customers who have actually failed to pay for any goods or services provided.
Credit Notes are used to adjust a Customer’s Accounts Receivable balance to reflect reality - for whatsoever the cause or reason. No greater interruption required.
This was exactly my point. The student in question not only failed to pay late fees, but walked away from the major portion of a tuition bill. One could argue semantics, but no forgiveness was involved in my mind. The customer breached the contract repeatedly, then left a bad debt behind.
To clarify, my previous and last post were focused from @success127 last question and the subsequent posts:
“How about those invoices that have been already paid in full but because they paid past the due date and incurred the late charges”
Thanks Tut & Brucanna,
I have put both of your suggestions to the test. Both work! In term of tax reporting, would you suggest the Journal or the Credit Notes?
As long as you select the same tax code, the result should be identical. Remember, the tax was calculated back when the sales invoice was written. And you’ve probably already remitted it to the authorities. Reversing the transaction by either method also reverses the tax.
Thanks Tut!