In 2012 my company sued another company and one of their owners in attempt to collect $32,000 in unpaid invoices from 2011. My company's accounting is cash method. When filing the 2011 Fed tax returns the $32,000 was not included as gross receipts/sales but the $30,000 cost of goods was included as material costs. Recently the owner's attorney contacted me to negotiate a settlement. I agreed to accept $15,000 to release the judgement. My question is how do record in QB? Show receiving a payment of $15K and issue a credit for the balance? Or show receiving the payment for $15K and write off the balance as bad debt? Does it really make a difference?
And how do I report on 2021 Fed return since I already claimed the COGS in 2011? My head is spinning because everything I've read says I can only report the amount I actually received, $15K, as gross receipts/sales and $0 for cost of goods and the credit memo or bad debt write off doesn't come into play anyway. Am I missing something?
Appreciate any input. Thank you in advance.
My company's accounting is cash method.
in QB you can use the accrual method for book purposes and then convert to the cash basis for tax purposes. so for tax purposes, you have $15K of income. if you're using the cash basis for book purposes, the entry would simply be a debit to cash and a credit sales for $15K
if you're using the accrual method for book purposes then the $32K should have been reported as revenue in the year of sale and reflected as an account receivable. I'm assuming for book purposes you left the $32K on the books as an account receivable. so this year you make an entry debit cash $15K, debit bad debts $17K credit accounts receivable $32K. then when you convert to cash basis for tax purposes. the $15K should show up as revenue and the $17K bad debt should disappear (it becomes a debit to equity). in short, using the cash basis you can't have a bad debt because income is not recognized until received so if you never receive it you have no revenue and thus no bad debt.