Record a bad debt in Xero

You can write off a bad debt in Xero in different ways. We recommend you discuss this with your accountant or bookkeeper as the method you choose will depend on your GST registration status and how you want the transaction to be reported in your GST return, Cash Summary report and Profit & Loss report.

We show you one way to write off the bad debt and record a recovery. We recommend you ask your accountant or bookkeeper for the best method for your organisation.

Write off a bad debt

You might use this method if your organisation is registered for GST on the Invoice or Payments basis.

  1. Find the invoice that you want to write off.
  2. Click Invoice Options, then select Add Credit Note.
  3. In the Account field, select your Bad Debts account, or select + Add new account... to add a new account to your chart of accounts.

    Credit note with bad debt write off going to thebad debts account with GST added.

    If you're on a payments basis for GST, you may wish to code the credit note to the same account code and tax rate as the original invoice. This will have a nil effect on the GST Return. Then enter a manual journal to move the sales amount to the Bad Debts account using the tax rate No GST.
  4. Ensure the date, tax rate and credited amount are correct.
  5. Click Approve.

After you complete the write off

Your Cash Summary report shows:

  • A revenue item that the invoice was originally coded to (such as Sales).
  • An expense item (such as Bad Debts).

These two amounts net off to zero.

If you're on a payments basis for GST, on your GST Audit Report Xero shows:

  • The GST portion of the written off invoice amount in the 15% GST on Income section.
  • The GST portion of the credit note amount in the 15% GST on Expenses section.

These two amounts net off to zero.

Recovering written off bad debts

If you later receive payment (in part or full) for a bad debt you've written off, add a receive money transaction to record the payment recovered.

  • In the Account field, use the same account you selected in your credit note.

    You should consider the tax implications when choosing an account. Talk to your accountant or bookkeeper if you need assistance.

  • In the Tax Rate field, select the appropriate tax rate if you claimed GST when you originally wrote off the debt.