Record a Bad Debt in Xero
Follow these instructions to write off a bad debt, or generate a discount for a customer after the original invoice has been generated and sent
Sometimes a business needs recognise that an invoice is no longer recoverable, and should write that amount off. Additionally, sometimes a business decides to provide a customer with a discount after the original invoice has been issued.
You can follow these instructions to record these types of transactions in your Xero subscriptioin.
Note that these instructions are appropriate regardless of if you account for GST on a cash or accruals basis.
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Check the Chart of Accounts for the Required Accounts
To write off a bad debt, or to apply a customer discount after the invoice is generated, you need to have the correct accounts setup in your Xero subscription. If you have not previously written off a bad debt, or provided a customer discount, you should check the appropriateaccounts exist by following these steps:
- In the Accounting menu, select Chart of Accounts.
- Identify the Bad Debts Expense account and the Discounts Given account. Note these accounts may have slightly different names depending on the business and their preferred description. Both accounts should be expense accounts with the default tax code of GST on Expenses.
Write off a Bad Debt
To write off the bad debt you need to do the following:
- Find the invoice that is to be written off (in the Business menu, go to Invoices, then click Awaiting Payment).
- If you are using Classic Invoicing click Invoice Options, then select Add Credit Note.
- If you are using New Invoicing click the menu icon and select Create and apply credit.
- In the Account field of the credit note, select your bad debts account.
- Check that the date, tax rate and credited amount are correct.
- Click Approve.
Create and Apply a Customer Discount (After the Invoice has been Generated and Sent)
To create and apply a customer discount after the original invoice has been generated and sent, follow the same steps as outlined above, but select the customer discount account, rather than the bad debts account.
Recovering written off Bad Debts
If you later receive payment for a debt that was written off, you can either create a new invoice (using the bad debts expense account), or a receive money transaction against the bad debts expense account. In both cases, you should record the deposit as GST on Expenses.