When a warranty company chooses not to pay the dealership directly for completed warranty work, they may instead deduct the amount owed from what the dealership owes them as a supplier. This article explains how to handle that in Xero using a clearing account, since Xero does not have a built-in function to convert a customer invoice directly into a supplier credit note.
Scenario
A common example of when this process applies:
The dealership completed a warranty service job for The Unit Company. The invoice is sitting on The Unit Company's customer record in Xero as outstanding.
The Unit Company is also a supplier. Rather than paying the dealership directly, they want the amount owed for warranty work deducted from what the dealership owes them as a supplier.
Steps
Step 1: Create a Clearing Account in Xero
Create a new chart of account in Xero to use as a clearing account. In this example, the account is named BP Warranty Clearing and is set up as a liability account. If you already have a clearing account, you can use it — but confirm that Xero accepts the account type for this process (for example, Xero may require a Current Asset account type in some configurations).
When setting up the account, make sure the Enable payments to this account checkbox is ticked.
Step 2: Pay the Customer Invoice to the Clearing Account
Open the relevant customer invoice for the warranty work in Xero. Record a payment against the invoice, selecting BP Warranty Clearing as the payment account. In the Reference field, enter the credit note number received from the warranty company.
Step 3: Create a Supplier Credit Note Against the Clearing Account
Create a new credit note on the supplier's account in Xero. Use the same BP Warranty Clearing account as the account code on the credit note line.
End Result
When the process is complete, you should see all three of the following:
The customer invoice is marked as paid and no longer appears as outstanding on the customer record in Xero.
A supplier credit note is now sitting on the supplier's account in Xero.
The BP Warranty Clearing account balance is zero — a zero balance confirms the process was completed correctly.



