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4 min 4 sec
0:00
Two bits of bad news
0:24
The disputed invoice
0:48
Credit notes
1:19
Writing off a bad debt
1:55
Credit note or bad debt?
2:19
Handling both in Beeswax
3:01
Recap and quiz
Accounting 101
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Keeping it straight
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Episode 22
Bad Debts and Credit Notes
(When an invoice doesn't go to plan.)
One client disputes an invoice and another stops paying altogether. When to use a credit note, when to write off a bad debt, and how the two differ.
credit notes
bad debts
refunds
write-offs
Transcript
0:00
Two bits of news for Maya this week. Corner Café isn't happy with an invoice. And Kestrel Events, who owe her eighteen hundred, have stopped answering the phone. Then the emails. Then, worryingly, the door.
0:15
Today: credit notes and bad debts. What to do when an invoice doesn't go to plan.
0:24
Start with the dispute. Corner Café's invoice was twenty-four hundred. They say four hours of revisions were never agreed. Maya checks her emails. They've got a point.
0:36
So she agrees to take off four hours. Four hundred and eighty. Not with an eraser, though. The change needs to be recorded, clearly, so anyone can see what happened, and why.
0:48
The classic tool is a credit note. A document that says: we're reducing that invoice, by this much. It's an invoice, in reverse.
0:57
Debit services, four hundred and eighty. Credit trade debtors, four hundred and eighty. Income comes down, and so does what the café owes. They now owe nineteen twenty.
1:10
And if the café had already paid in full? Then the credit becomes a refund. Money goes back to them, and the books record it going out.
1:19
Now, Kestrel Events. Eighteen hundred, four months overdue. Reminders, a final notice, and a phone call straight to voicemail. Then the news. They've gone into liquidation.
1:32
At some point, you have to admit it. That money isn't coming. Leaving it in trade debtors just makes your balance sheet lie. Politely. But it's still lying.
1:42
So you write it off. Debit bad debts, an expense, eighteen hundred. Credit trade debtors, eighteen hundred. The income you earned stays earned. You're just recording that you'll never collect it.
1:55
Notice the difference. A credit note says: we charged too much. A bad debt says: we charged the right amount, and they didn't pay. One reduces income. The other is an expense.
2:09
And if you charged tax on that invoice, many countries let you claim it back on a bad debt, after a waiting period, and with conditions. Check with your accountant before you do.
2:19
In Beeswax, a finalised invoice that hasn't been paid can be edited in place. Add a line for the agreed discount, as a negative amount, and the invoice and the ledger update together. The version history keeps a record of the change.
2:34
If an unpaid invoice shouldn't exist at all, void it. It keeps its number and its history, but leaves the ledger, tax reporting and receivables. And if the client has already paid, Refund Customer starts a customer refund, ready to finalise.
2:50
For a bad debt, Beeswax has a bad debts expense account ready and waiting. The write-off itself, and the tax that comes with it, is one to do with your accountant.
3:01
So. A credit note reduces an invoice: less income, and less owed. A refund sends money back. A bad debt is an expense: you earned it, but you'll never collect it. And whatever changes, record it. Don't hide it.
3:18
Quick one. A client owes you a thousand. You agree a hundred and fifty credit for a late delivery. Then they go bust, without paying the rest. What's the credit note? And what's the bad debt?
3:32
Have a think.
3:36
The credit note is one hundred and fifty. The bad debt is eight hundred and fifty. The credit reduces the invoice first. The rest is what you'll never see.
3:46
Maya has since added a line to her quotes. Revisions beyond two rounds are charged by the hour. The café signed without blinking.
3:55
Next time: loans and owner's pay. Interest versus principal, and the eternal question of how Maya actually pays herself.