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 VAT registration status and how you want the transaction to be reported in your VAT return, Cash Summary report and Profit & Loss report.

If you later receive payment for part or all of the bad debt you've written off, record the bad debt recovered.

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 the VAT Accrual Scheme and the debt is more than 6 months overdue. Speak to your accountant or bookkeeper to find out the best method for your organisation.

  1. Find the invoice that you want to write off.
  2. Click Invoice Options and select Add Credit Note.

    Image showing the option for creating a credit note for an invoice.

  3. Change the account on the credit note to the Bad Debts account.

    You can add a bad debts account if you don't already have an account like this in your chart of accounts.

  4. Image showing credit note with bad debts account.

  5. Ensure the date, tax rate and credited amount are correct.
  6. Click Approve.

After you complete the write off

Your Cash Summary report shows:

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

These 2 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:

  1. Add a receive money transaction:
    • In the Account field, select 'Bad debts recovered' (you may need to create this account), or use the account recommended by your accountant or bookkeeper.
    • In the Tax Rate field, select the appropriate tax rate if you claimed VAT when you originally wrote off the debt.
    • Enter other details of the payment you've received.
  2. Click Save.

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