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 the effect on your sales tax return, Cash Summary report and Income Statement.

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 organization.

Write off a bad debt

You might offset the bad debt against a liability account or an expense account, depending on the circumstances. This example uses an expense account.

  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.

If you're on the cash basis for sales tax, on your Sales Tax Audit report Xero shows:

  • The sales tax portion of the written off invoice amount in the Tax on Sales section.
  • The sales tax portion of the credit note amount in the Tax on Purchases section.

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, use the same account you selected in your credit note, or use the account recommended by your accountant or bookkeeper.

      You should consider the sales 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 sales tax when you originally wrote off the debt, or use the rate recommended by your accountant or bookkeeper.
    • Enter other details of the payment you've received.
  2. Click Save.

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