Write off an unpaid sales invoice (with Sales Tax) as Bad debt

We will write off this Tax Invoice of 100 and VAT amount of 17.5 (17.5% VAT rate)

Follow the steps below to write off bad debt on an Tax invoice / Tax Invoices.

  1. Create an Expense account called Bad debt or Unrecoverable debt.

  2. Go to journal entries.

Select the bad debt account and enter the amount to be debited.

Note: The amount to be debited is the tax exclusive amount in our case 100 the 17.5 will be debited to the Tax Payable or the Sales Tax account to cancel it off. If in your part of the world you cannot recover the tax element on Bad debt, you will have to enter the whole 175.5 for the bad debt in the journal entry (no splitting) and add an explanation.


Now the invoice is closed.

@lubos Possible to use Opened and Closed for statuses of invoices?

Just some questions

  1. Why use a journal instead of a credit note, where you can also select the Bad Debt account and nominate it against an invoice ?
  2. Why enter the tax payable amount as a separate line instead of using the Tax field ?
    By posting directly to the tax payable account the tax report totals wont get update correctly.

I tried a sample transaction to test this out, and used the tax code in the journal entry. (I had never actually done that before.) To my surprise, the program ignored the tax code. It only moved the base amount. So, if doing this by journal entry, the separate tax line seems necessary.

No it doesn’t, it treats the base amount as tax inclusive so by default you must enter the gross value

The journal with tax code

The Tax Report

However if you enter the tax as a separate line value then the journal is

But the tax report is blank

Also if you go back to the first tax report, note how the adjustment is being shown under purchases whereas if you do the adjustment via a credit note

Then the tax report shows the adjustment correctly under sales

Not sure what started this topic but its guidance is misleading

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PS: the current Journal Entries Guide is silent with regards to how to enter amounts with tax codes

That’s what I missed. Since there is no tax-inclusive checkbox for journal entries, I assume they were tax-exclusive. Looking back at the transactions, I think I may have had my display period set incorrectly, too, as I was simulating a bunch of stuff in a hurry to answer other questions.

Good point. I’ll put that on the list to modify.

To my Knowledge Credit notes are used to reverse a sale. usually because of unwanted products or over billing.
Take for instance a customer who is dead or is now nowhere to be found, a credit note will do the job but it usually not the right commercial document for events like that at least in my jurisdiction (I will find out more)
A credit note gets the work done though.

This needs to be done.

Good point, I didn’t consider the report, in my steps.

After I solve my problems i like to share with other users

In my country we usually keep our eyes on the balance to be paid to the tax authority in the accounts for which this method easily takes care of.

And yes after entering the whole amount 117.5 in my case and selecting the tax code it worked perfect as @Brucanna said with Tax liability going back to zero. The net purchases and tax paid on the report is the reversal journal netting the sales and tax collected to zero. I’m confused though @Brucanna why are your figures in negative in the report ?

At least i have solved a problem:slightly_smiling_face:

Oh i get it. You probably didn’t issue any sales invoice to reverse in the first place.

My understanding is that Credit Notes are used for all adjustments to a Customer’s Accounts Receivable account regardless of the reason for the adjustment. The credit note reason is explained by the description / notes and the chart of account used.


brucanna and Tut please help ;

i had raised sales invoice in january this year of tsh 120,000, vat amount is tsh 21,600 so total amount is tsh 141,600.
now i want to write it off , because the customer is not going to pay it for some reasons, so from the invoice itself i created credit note to write it off the whole amount into the bad debt account - an expense account as per Brucanna approach ;

but while the balance on the invoice is written off- actually it says paid in full , the tax transactions report still shows that am owed to pay as tax collected , it is still there in the tax transaction report

so how do i clean this mess , because i want to make tax return for the month of january and i want to get rid if it before i proceed

please help

i mean it is still showing in tax payable , how do i remove it ?

I think you have not done things exactly as you described. If you use the Copy to button to copy a sales invoice to a credit note, the entire contents are copied over, including tax codes. And when the credit note is created, the Tax payable account is adjusted. Here is an illustration, beginning with the sales invoice:

The resulting Summary (there are no other transactions in this business):


The sales invoice is copied to a credit note:


Both Accounts receivable and Tax payable are zero:


And here is the Tax Transactions report:

So you need to drill down on the Tax payable account in the Summary to see what is making up the balance. Look at the transactions involved to make sure proper tax codes have been applied.

thanks Tut;
so may be i explain again ,
when copying and creating the credit note i used the account called bad debt-an expense account as explained. Is it the reason for not adjusting the tax payabe account ? , may be no need of using that account here when doing things this way , in your example above which is very clear have you used the bad debt account ?

can i reverse teh credit note transaction so that i do it another way around ? how can i reverse the trx?

because may be on copying the credit note i was not supposed to change any thing except to say create , changing an account to bad debt is it the reason for not reflecting ?

please make few things clear.
did you receive the items back which you had sold in your sales invoice?

if you have not received the items back and you are not going to receive the payment also, then you should not adjust the tax payable. according to your records you have sold the item and you are liable to pay the tax to your government even if you have not received the payment from your customer.

in the above case you only need to make a journal entry debiting your accounts receivable and crediting your bad debts account for the full invoice value. you do not have to issue any credit note.

in simple terms i want to delete the invoice inclusive of the tax , because i have not been paid and i will not , so you wont pay tax as you have not collected it , its impossible in business world and think against the common logic , this is a VAT , you collect then you submit to the gov, its like you are an agent ;

the tut approach is Ok for me , only that i did the same and is not reflecting as it is on his example , but after some test on test business company , i came to know that you have to use same account you used during creating the invoice , if you change it let us say to bad debt account then things will start going weird ,i tested it and it reflected if i leave everything intact when copying the credit note from the invoice , now i want to delete the credit note and reverse teh trx because my invoice now is paid in full status but tax payable is still there because i used bad debt account instead of leaving everything intact , some body help me how do i reverse credit note trx so my invoice become unpaid and i repeat it in the correct way

i am not aware of the tax rules of your government.
usually both the supplier and customer would file their monthly returns for both sales and purchases. so if your customer files his monthly returns for your invoice, you are also obliged to file it in your returns. the payment or non-payment has nothing to do with the sale transaction.
a credit note is issued only when the whole or part of the goods sold are returned to you or if the customer has overpaid for their purchase.
you cannot simply make a sales invoice and issue a credit note later. this is fraudulent to avoid tax payment.
i would recommend you consult your auditor first regarding this.

sharpd. thanks
but finally resolved it , as per Tut approach , the thing is
1.when copying dont change an account to say bad debt or something like that it will cause some issues , just copy and create as it is , dont messup around
2.i am making return of January, and credit not i created yesterday only , so on tax transaction report of January was not reading it , but when i run the whole thing from January to date it reflected , to be precise with my numbers i changed the date of the credit note to be end of January and so it reflects very good now

am done now on my case

on that case sharpd let me explain a bit
it might not be goods you supplied , it may be service you offered, and after sometime of demanding your payment you came to notice that you are not going to be paid , so you want to cancel that invoice altogether inclusive of tax, your customer neither will file it as he paid the tax because he has not paid you a dollar , so it is a bad trx , a loss to you , and you may want to take whatever precautions in the future not to trade with that customer , may be blacklist that customer ,so its like you offered a free service , it doesn’t happen often but it happens , especially with gov institutions , so dont worry on that ,tax laws on VAT are almost the same across countries , but this is when your customer hasnt paid a dollar → so no return on that , and you havent received a dollar → so no return in that , a nill trx

in either case my purpose is to delete the invoice , and i think credit note serves the purpose , or some may come and recommend whats the best way to delete the invoice using journal or credit notes , but as per Brucanna and Tut approach , i tend to understand that the best way is to use credit notes

I haven’t read every message here in this discussion but there are some occasions that may call for Voiding an invoice instead of deleting it or using credit note.

  1. If someone enters a purchase invoice with the intention to steal money from the company.

  2. If an invoice is issued in error and is discovered before the payment time. A debit note wouldn’t be useful because it an internal activity (correction of the error.). Debited and credit notes are meant to be sent to trading partners.

In cases like above you wouldn’t need to send a note to the supplier.

You can only delete or void the invoice.

Here is my suggestion which is applicable to void sales invoice .

  1. Edit the invoice and put 0 in all the rate/unit price fields.
    In the main description field start the narration with VOID INVOICE:

VOID INVOICE: Purchase of 20 HTC 10 phones. You may put in further explanation in the

Don’t forget to remove all amount you may have entered as discount, or withholding tax.

You may scan and attach the original invoice, or export the original invoice for attachment.

The above method is good if you want to keep the record of the void invoice, if not you can just delete the transaction if no cash or tax has been paid already on the invoice, or issue a debit or credit note to reverse the effect of the invoice on the party’s account.

Just delete the entry and do it again, is that difficult?

Let me emphasize that in my previous post, I only addressed @chaz’s complaint that copying a sales invoice to a credit note left the tax amount in the Tax payable account. I wrote nothing about whether it was appropriate or correct to use a credit note to write off a bad debt.

I also wrote nothing about the effects on income and expense accounts. So let me expand. If you leave the line item on a credit note posted to the same account as on the original sales invoice, the income is removed from the income account. If you change the posting to a bad debt expense account, the income remains. But it is now offset by the bad debt expense. So the effect on the bottom line is identical. Either way, however, the tax amount is removed from Tax payable. Therefore, my initial comment that @chaz had not done things as stated appears correct.

The question of which transaction form to use to write off a bad debt is an entirely different question. Several factors could influence the decision. Most important is probably local tax law. Is the tax payable to the authority based on delivery of goods or services or payment for goods and services?

  • Frequently, it is the former, so removal of the tax from Tax payable would not be allowed. The government will demand its taxes, even if a business is unable to collect from its customers, on the principle that you should not have extended credit to an unworthy customer. In that case, a journal entry debiting the bad debt account and applying the tax code only to the credit to Accounts receivable is the right approach. This leaves the tax in Tax payable and the income in the income account. It puts the full amount, including tax, into the bad debt expense account, both offsetting the income and recording the tax expense you are now incurring on behalf of your bad customer. The net result is a loss on the transaction equal to the tax amount.

  • A similar result can be achieved with a credit note on which the line item is posted to the original income account, but the tax code is removed. This removes the income from the income account, but leaves the tax in Tax payable. However, the net loss on the transaction will not appear until tax is remitted, so somewhat delayed. That can be countered by modifying the line item to post the gross amount, including taxes, to the bad debt account and removing the tax code. This way, the result is identical to the journal entry described above and the net loss is reflected immediately.

  • On the other hand, if tax becomes payable only when you receive payment, then a journal entry debiting a bad debt account and crediting Accounts receivable can be used, but you should apply the tax code to both debit and credit. This removes the tax from Tax payable. It leaves the income in the income account and offsets only the income in the bad debt account. The net result on the P&L is zero.

  • This same result can be achieved with a credit note, too, by posting the line item to the bad debt account and applying the tax code.

So, whether tax is payable based on delivery or only collection, the accounting can occur via either journal entry or credit note. But which more accurately records what has happened? My opinion is that credit notes are not appropriate for writing off bad debts. They create the impression the debts have been forgiven when they have not. And they rob you of historical information on bad debt frequency and amounts. They also reduce your recorded income, distorting the picture of your productive sales or service activities. It is better, in my opinion, when the P&L shows both income earned and offsetting bad debt.

Further, in some jurisdictions, tax filings must, by law, include all return-adjusted sales, with bad debts being separately deducted. Although the credit note approach can (as outlined above) post to the bad debt account, it still suggests concurrence by your business with your customer’s bad behavior.

Another consideration, introduced late in the discussion by @chaz, is that a supposed bad debt can later be recovered. There is no way to reverse a credit note except with a new sales invoice, which does not seem appropriate. Nor would deletion of a credit note be correct, especially if the debt becomes recoverable in a new financial period. But a reversing journal entry is always acceptable.

So my personal preference is to record bad debts via journal entries.