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.

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 Cash or Accrual Scheme and the debt is more than 6 months overdue.

  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.

    Image showing credit note with bad debts account.

    If you're on a cash scheme for VAT, 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 VAT Return. Then enter a manual journal to move the sales amount to the Bad Debts account using the tax rate No VAT.
  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 cash scheme for VAT, on your VAT Audit Report Xero shows:

  • The VAT portion of the written off invoice amount in the 20% VAT on Income section.
  • The VAT portion of the credit note amount in the 20% VAT 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 VAT when you originally wrote off the debt.

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