Cash basis - why do credit memos show up as negative income if the original invoice never showed up in income?

Hello there, mindy14,

I'm here to clear things out for you about writing off bad debt in QuickBooks Online.

Credit memos will show up as negative income if you're using the same item on the invoice. You need to create a bad debt item and use expense account to track uncollectible receivable. This amount will appear on the Profit and Loss report under the Bad Debts expense account.

Hence, there are four steps you need to consider when recording bad debts:

Step 1: Create a bad debts expense account

1. Go to Settings ⚙, select Chart of Accounts.
2. At the upper right, click New to create a new account.
3. From the Account Type ▼ drop-down menu, click Expenses.
4. From the Detail Type ▼ drop-down, select Bad debts.
5. In the Name field, enter “Bad debts.”
6. Click Save and Close.

Step 2: Create a bad debt item

1. Go to Settings ⚙, choose Products and Services.
2. At the upper right, select New, and then Non-inventory.
3. In the Name field, enter “Bad debts.”
4. From the Income account ▼ drop-down, select Bad debts.
5. Click Save and Close.

Step 3: Create a credit memo for the bad debt

1. Click + New.
2. Select Credit memo.
3. Select the customer from the Customer ▼ drop-down.
4. In the Product/Service section, select Bad debts.
5. In the amount column, enter the amount you want to write off.
6. In the Message displayed on statement box, enter “Bad Debt.”
7. Click Save and Close.

Step 4: Apply the credit memo to the invoice

1. Select + New.
2. Under Customers, select Receive payment.
3. From the Customer ▼ drop-down, select the appropriate customer.
4. From the Outstanding Transactions section, mark the invoice.
5. From the Credits section, mark the credit memo.
6. Click Save and Close.

Once done, you can run an Account QuickReport to check all the receivables you tagged as bad debt. Here's how:

1. Go to Settings ⚙.
2. Select Chart of Accounts.
3. In the Action column of the bad debts account, select Run report.

In case you want to get a QuickBooks-certified bookkeeper, check out the QuickBooks Live Bookkeeping page. They'll help categorize transactions and reconcile your bank statements every month so your books are always 100% accurate.

Should you need anything else, don't hesitate to comment below. I'm always around to help.

Thank you and stay safe!

Hi Mindy, I am having the same problem and confused because not accounting expert. We are receiving statements on a cash basis and they are being negatively impacted by the use of credit memos to pay current invoices. This does not involve bad debt. Did you find a way to show the credit memo income somehow on the cash statements. If I go to accrual, it does not fix it, which is odd to me. Thx.