Record dishonored and reversed payments

Learn how to record a dishonored customer payment, or a reversed payment to your supplier.

Dishonored customer payment

When a customer payment dishonors, you need to remove the payment from the invoice and reset the invoice to awaiting payment. This applies to single payments made against individual invoices. You can also follow these steps for bounced checks.

  1. Record the dishonored payment
  2. (Optional) Charge the customer for bank fees incurred
  3. (Optional) Write the debt off

Record the dishonored payment

Follow these steps to account for the transactions in your bank account.

  1. Find and delete the original payment received from the bank account or original invoice. This removes the payment from the invoice and changes its status back to awaiting payment.
  2. Create a receive money transaction for the amount of the original payment received. Choose an account such as Dishonored Customer Payments to code the amount to. If you don't have one on your Chart of Accounts, create a new one. Reconcile this receive money transaction to the customer payment received in your bank account.
  3. Create a spend money transaction for the reversal. Code this to the same account as the receive money transaction created in step 2 above. Reconcile this spend money transaction to the reversed payment in your bank account.
  4. Add a note against the invoice.
  5. When the replacement customer payment clears, you can reconcile it to the unpaid invoice.

Charge the customer for bank fees incurred

Follow these steps if you want your customer to reimburse you for any bank fees charged:

  1. When the bank charges appear on your bank statement, create a spend money transaction and code it to an account such as Bank Fees.
  2. Advise the customer that they owe you money for the bank charges incurred.
  3. When they pay you, create a receive money transaction and code this to the same account as the spend money transaction created in step 1 above.

Write the debt off

If the customer is not going to pay you, raise a credit note in Xero to write this debt off.

Reversed supplier payment

Learn how to account for payments you have made that are reversed by your bank. Both the payment and receipt show in the bank statement and require reconciling. The supplier bill needs to be showing as unpaid. This applies to single payments made against individual bills.

How to record the reversed payment:

  1. Find and delete the original payment made, from the bank account or original bill. This will remove the payment from the bill, leaving it unpaid.
  2. Create a spend money transaction for the amount of the original payment made. Choose an account such as Reversed Payments to code the amount to. If you don't have a suitable account in your chart of accounts, you can create it. Reconcile this spend money transaction to the original payment in your bank account.
  3. Create a receive money transaction for the reversal. Code this to the same account as the spend money transaction created in step 2 above. Reconcile this receive money transaction to the payment reversed by your bank in your bank account.
  4. If your bank has charged you a fee, code it to your Bank Fees account in the usual manner.
  5. Add a note in Notes against the bill if you want to.
  6. When you pay your supplier again, you can reconcile it to the unpaid bill.