Bad Debt Processing

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If you have a bad debt (i.e. a customer invoice that you know won’t get paid) you can write this off to bad debts in Xero.  This will mean that you won’t have to pay tax on the revenue in the financial year and also means that you can claim back any Output VAT previously paid over to HMRC on the sales invoice (this is only if you are on invoice accounting for VAT).

To process the bad debt in Xero, firstly find the sales invoice within awaiting payments (Accounts>Sales>Awaiting Payment):

So, in this example if we want to recognise invoice 0038 as a bad debt, we will click on this invoice to open it up:

Click on “Invoice Options” and then “Add Credit Note”.  Xero will automatically create a credit for the same amount as the original invoice using the same VAT treatment.  The only thing you will need to change is the account to 495 – bad debts (if you don’t have this account, see below notes on adding a new nominal account):

Once you are happy with the credit note, click “Approve”

This will automatically allocate the credit note to the invoice, so the invoice will no longer show within “Awaiting Payment”.

If you need to create a bad debt account, please follow these steps:

Go to Settings>Chart of Accounts:

Click on “Add Account”

Create an account using the details as below.  If 495 is not available select the next available number in this series.

Click “Save”.

You can then go back to your credit note and choose this new account.

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