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Transfer a Customer Invoice to a Supplier Credit Note in Xero

Use a clearing account in Xero to convert a warranty customer invoice into a supplier credit note when a warranty company deducts payment from amounts owed.

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.

Shows the 'Add New Account' dialog in Xero. The dialog displays fields for Account Type (set to 'Current Liability'), Co


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.

Shows an invoice payment screen for Invoice INV-00000307 from The Unit Company. At the bottom in the 'Receive a payment'


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.

Shows a 'New Credit Note' form for The Unit Company. The Reference field at the top shows 'C/N 123' and is highlighted w


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.

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