How do I handle bad debt?

Applies to: Maxio

Bad debt can be managed in Maxio by either issuing a credit memo to reverse the invoice or writing off the balance to Bad Debt Expense in your general ledger.

Maxio does not provide accounting advice. Handling bad debt in accordance to GAAP is a complicated accounting topic.

Answer

Use a credit memo when you need to reverse an invoice in Maxio and adjust AR and deferred revenue.

Alternatively, record a write-off in your GL to expense the balance while maintaining revenue recognition as per your policy.

GL sync behavior differs between these methods — credit memos update AR and deferred revenue; write-offs affect only your financial statements.

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The following methods show how you can manage bad debt within the Maxio, depending on your organization’s accounting policies, and how you choose to recognize revenue.

Method 1: issue a credit memo

Complete a reversing contract change to issue a credit memo. Once this action has been completed, a credit memo and negative (reversing) transaction will be automatically created keeping the account in balance. If your General Ledger (GL) integration is enabled, sync the credit memo to your GL and apply it to the invoice. Once applied, sync again to update Maxio with the applied status.

Method 2: write off the bad debt

If you write off bad debt by crediting your Accounts Receivable (AR) and debiting your Bad Debt Expense, no further action is required in Maxio. Sometimes this is done with a specialized "Bad Debt" item that posts to the Bad Debt Expense account.

In most cases, this item should be configured not to sync with Maxio, particularly if the bad debt adjustment is recorded in your GL only and you do not want it to affect revenue recognition within Maxio. If your workflow requires otherwise, consult your accounting team before modifying sync settings.

In this method, revenue is typically recognized for services delivered, as the bad debt adjustment occurs outside of Maxio. Because the invoice or journal entry is not synced, the deferred revenue balances in Maxio remain unchanged.

Examples

To illustrate how each method affects your GL, consider the following case.

The original invoice is $10,000:

• $8,000 for a subscription item posted to “Deferred Revenue – Subscription”;
• $2,000 for a professional services item posted to “Deferred Revenue – Services”.

This results in $10,000 AR, $8,000 deferred revenue (subscription), and $2,000 deferred revenue (services).

Using method 1

If we issue a credit memo for -$8,000 for the subscription item and -$2,000 for the professional services item, our AR account will be reduced by $10,000, 'Deferred Revenue - Subscription' will be reduced by $8,000, and 'Deferred Revenue - Services' will be reduced by $2,000.

Considering both the original invoice and the credit memo, the net change for all of our accounts is zero.

Using method 2

A credit memo is issued using an expense item—such as one that posts to the “Bad Debt Expense” account—for the full $10,000. This reduces Accounts Receivable by $10,000 and increases the expense account by the same amount.

Considering both the original invoice and the credit memo, the net change for our AR account is zero, but the Bad Debt Expense increased by $10,000, and the 'Deferred Revenue - Subscription' and 'Deferred Revenue - Services' accounts are at a net change of $8,000 and $2,000, respectively, from the original invoice.

Choosing the right method

Method 2 leaves a balance in your deferred revenue accounts, which may indicate that revenue should still be recognized. Whether recognition is appropriate will depend on your organization’s revenue recognition policy. Importantly, recognizing revenue does not require an expense account—it typically involves shifting balances from deferred revenue to earned revenue based on delivery of services.

Method 1 leaves no deferred revenue balance and does not affect any expenses.

Choosing between Method 1 and Method 2 depends primarily on whether you plan to recognize revenue for the transaction. Also consider your internal accounting procedures and reporting requirements. Consult your finance team to ensure the method you choose aligns with your broader accounting strategy.