Bad debt is an amount that is owed to your organization that is not going to be paid by the customer for one reason or another. You can close out your receivable with an expense account. This will allow you to track any income that was received, but then also track the expense for the unpaid difference. Examples might be tuition, membership dues, or a service performed by your nonprofit. This resource will cover what to do if you are wanting to account for this bad debt in the same year as well as how to account for it in a different year than when your invoice was originally dated for.

Using Your Expense Account in Accounts Receivable

You can create an expense account for this type of situation from your Chart of Accounts. You might call this expense account Bad Debt or Allowance for Doubtful Accounts. The name of this account is up to your organization. Within the Expense section of your Chart of Accounts, click the "+" (plus) button on the account group that you’d like to add this account, assign a number and name, and then click "Save."

Posting a Negative Amount in Accounts Receivable

Now that you have your account created, you can use it to close out any receivables that you are not expecting to receive payment on. It is up to your organization to decide when you decide to mark these unpaid receivables as bad debt. You will go into your Accounts Receivable module and scroll down to the Receive Payments section. You’ll first need to edit your original receivable to change the amount and also split it between your income account and the expense account for bad debt. To do this, click on the "Due Date," which will make the receivable available for editing.

Once your receivable is open in edit mode, you will edit the amount of the invoice to only the amount received, and also split the original invoice to count the unpaid amount to your expense account for bad debt.

Closing Out Incomplete Receivables

In the case from the example above, you have a receivable for $1,000 and only $800 was received. You will click the "add row option to split it so the original billed amount of $1,000 is counted as income and the remaining $200 is counted as a negative amount to your expense, netting the two amounts to $800. Once you fill out all of the information for the second from you should see the "total bill amount" automatically adjust to $800. See the example below:

After you click "Submit" to commit these changes, you will now see that this invoice shows in the History (Closed/Fully Received) section of your receivables module.

Bad Debt in a Different Period

In some situations, you may need to account for bad debt in a different year than when your invoice was originally dated for (For instance: tracking bad debt in 2025 for an invoice that was originally issued in 2024).

Creating Special Accounts for Allowance for Doubtful Accounts

In order to properly track this situation, you will want to go to the Chart of Accounts area, and create a new asset account. As stated above, you can call this asset Allowance for Doubtful Accounts (referred to as ADA for the rest of this article). You will also want to create an expense account for your bad debt which you might call Bad Debt Expense, or something similar. The name for both of these accounts is up to your organization.

Closing out your Receivable

For example, let's say that you have an invoice for $1,000 that was issued on 07-05-24. You've received $800 so far, but the customer will not be able to pay the remaining $200. In order to close out the receivable, you will want to go to the Accounts Receivable module, and post a $200 receipt, as of the date you want to count the bad debt in (for example: 01-01-25), which will be deposited to the new ADA register: 

Tracking Bad Debt Expense

From there, you'll want to go to the ADA register and post a payment of $200, using the Bad Debt Expense account, also dated for the period you want to account this debt in:  By doing these entries, you will effectively zero-out your ADA account, and successfully account for the expense for this bad debt in the desired period.

If you have any questions about these processes, feel free to reach out to our Customer Support Team. We’re always happy to help!