Record a bad debt in Xero | No Stress Accounting Knowledge Base

ⓘ This article is for small businesses who use Xero

Overview

Write off a bad debt by creating a credit note against the relevant invoice. This is just one way to account for bad debts.
We recommend you ask your accountant or bookkeeper for the best method for your organisation.

How it works

The method you use to write off a bad debt will depend on your sales tax registration status and how you want the transactions to be recorded in your reports.
If you're on an accrual basis for sales tax, you could apply a credit note to the outstanding invoice. Code the credit note to a specific bad debts account code.
If you're on a cash basis for sales tax, you might wish to code the credit note to the same account code and tax rate as the original invoice. To record the sale and bad debts expense, enter a manual journal using the tax rate No Tax.
Both methods will have a net zero effect on your reports and Sales Tax Report.
If the invoice contains tracked inventory, applying a credit note will increase the item's quantity and value. To prevent this, ensure you remove the item code from the credit note before approving it.

Find the invoice that you want to write off.
If you’re using new invoicing, click the menu icon and select Create and apply credit. In classic invoicing, click Invoice Options, then select Add Credit Note.
In the Account field, select the same account code as the original invoice or select your bad debts account.
Ensure the date, tax rate and credited amount are correct.
(Optional) If the Item Code field contains a tracked inventory code, remove the code to prevent an increase to the item's quantity and value.
Click Approve.

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.
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.
If you posted a manual journal to record the bad debt, you'll need to reverse

⚠ Warning
You should consider the tax implications when choosing an account. Talk to your accountant or bookkeeper if you need assistance.