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How to Reconcile a Returned Payment in Xero

Step-by-step guide to handling dishonoured, bounced, or reversed payments in Xero — for both individual invoices and batch payments. Covers clearing accounts, re-opening bills, and what to do while you wait for the replacement payment.

XeroReconciliationReturned PaymentsDishonoured PaymentsBank Reconciliation

What is a returned payment?

A returned (or dishonoured) payment is when a bank transfer fails after it's been recorded in Xero. The money leaves your account, gets rejected by the receiving bank, and comes back — resulting in two bank statement lines: the original debit going out, and a credit coming back in.

Common causes:

  • Incorrect bank account number or BSB
  • The recipient's account has been closed
  • Insufficient funds in the recipient's account
  • The payment was frozen or blocked by the bank

Xero doesn't know the payment failed — it still shows the invoice or bill as Paid. Your job is to reverse that, reconcile both bank lines, and re-open the invoice so it can be paid again when the replacement arrives.

Returned Payment — What Happens in Your Bank FeedDay 1Day 2–3Day 2–3 (continued)Day 5+Payment sentInvoice = PaidbouncesTwo bank lines appearDebit out + Credit back inClearing accountDebit reconciled → clearingCredit reconciled → clearingNet balance = $0 ✓Invoice back to Awaiting PaymentReady for replacement paymentNew paymentReconcile normally ✓

What is a clearing account and why do you need one?

When a payment bounces, you'll have two bank lines — a debit and a credit — that both need to be reconciled to something in Xero. The trick is that neither line directly relates to the original invoice (the invoice was already marked paid and needs to be reset separately).

A clearing account (sometimes called a suspense account) is a temporary holding account you reconcile both lines to, so they cancel each other out. The net effect on the clearing account is zero, and the invoice is reset independently by removing the original payment.

If you don't already have one, create it under Accounting → Chart of Accounts → Add Account. Set the type to Current Liability or Current Asset and name it something clear like Dishonoured Payments Clearing.

Dishonoured Payments Clearing AccountDEBITCREDITOriginal payment sentDay 1 bank debit$500Returned funds receivedDay 2–3 bank credit$500Net balance = $0 ✓ Account self-clears
Option ASingle invoice or billUSE WHEN:Bounced payment was against one invoiceRemove payment → reconcile 2 bank linesBoth lines go through clearing accountMost common scenarioOption BBatch deposit or paymentUSE WHEN:Bounced payment was part of a batchUnreconcile batch → remove invoiceReconcile updated batch separatelyThen follow Option A steps 2–3

Option A — Single invoice or bill

Use this when the bounced payment was against one invoice or bill (not part of a batch).

Step 1: Remove the payment from the invoice or bill

Open the invoice (if you're the payee) or bill (if you made the payment):

  • Go to Sales → Invoices (for customer payments) or Accounts → Bills to Pay (for supplier payments)
  • Open the relevant document — it will show as Paid
  • Scroll to the payment section and click the date link next to the payment to open it
  • Click Delete to remove the payment

The invoice or bill returns to Awaiting Payment status.

Step 2: Reconcile the original debit (money that went out)

Go to Accounting → Bank accounts and open the reconciliation screen. Find the original debit transaction (the payment that left your account on Day 1).

Click Create (not Find & Match). In the new transaction form:

  • Set the Account to your clearing/suspense account
  • Enter a descriptive Reference — e.g. Dishonoured payment — [Supplier/Customer name]
  • Match the date and amount to the bank statement line

Click Save. This reconciles the debit without re-paying the invoice.

Step 3: Reconcile the returned credit (money that came back)

Find the credit transaction in your bank feed — the returned funds arriving back into your account.

Click Create again. This time:

  • Set the Account to the same clearing/suspense account
  • Use the same descriptive reference so it's easy to trace
  • Match the date and amount

Click Save. The clearing account now has a debit and a credit of the same amount — net zero.

Step 4: Contact the supplier or customer

Before the replacement payment is made, confirm the correct bank details. Add a note to the contact in Xero (Contacts → [Name] → Notes) so there's a record of the issue.

Step 5: Reconcile the replacement payment

When the correct payment is made and appears in your bank feed, use Find & Match as normal to reconcile it against the reopened invoice or bill.

Option B — Payment was part of a batch

Use this when the bounced payment was included in a batch deposit or batch payment alongside other transactions.

Step 1: Unreconcile the batch

Go to Accounting → Bank accounts and find the reconciled batch transaction in your bank feed. Click it and select Unreconcile. This reopens the bank statement line.

Step 2: Remove the affected invoice from the batch

Go to the batch deposit or batch payment (found via Sales → Deposits or Accounts → Batch payments). Open the batch and click Edit.

Remove the invoice or bill that the bounced payment relates to. Save the batch — Xero updates the total and the removed invoice returns to Awaiting Payment.

Step 3: Reconcile the updated batch

The updated batch (without the bounced invoice) now sits in your bank feed with a revised total. Use Find & Match to reconcile it — the amounts should now match your bank statement.

Step 4: Reconcile the two returned payment lines

You'll have the original debit and the returned credit sitting in your bank feed, just like in Option A. Follow Steps 2 and 3 from Option A above to reconcile both lines through the clearing account.

Step 5: Reconcile the replacement payment

When the replacement payment arrives, reconcile it against the reopened invoice using Find & Match.

Tips for managing returned payments

Use a descriptive reference on clearing account entries. "Dishonoured — Acme Corp — June 12" is infinitely more useful than "EFT" when you're troubleshooting three months later.

Check your clearing account balance regularly. If it's not sitting at zero, you have an unresolved returned payment somewhere. Run a Balance Sheet report and look at the clearing account balance.

Log it in the contact record. Xero's Notes field on a contact is underused. A quick note — "payment bounced June 12, incorrect BSB, corrected June 15" — saves time if it happens again.

Ask for remittance advice on the replacement. If the original payment was part of a multi-invoice remittance, ask the payer to resend it so you know exactly which invoices the replacement covers. Remittance Go can process that PDF and recreate the batch payment automatically.

Returned Payment — Recovery Checklist1Remove payment from invoice or billResets document to Awaiting PaymentInvoices / Bills to Pay2Reconcile original debit → clearing accountDay 1 bank line — use Create tab, not Find & MatchCreate tab3Reconcile returned credit → clearing accountDay 2–3 bank line — clearing account nets to $0Create tab4Confirm correct bank details with payerLog outcome in Contacts → Notes for audit trailXero Contacts5Reconcile replacement payment normallyInvoice is back in Awaiting Payment — use Find & Match

Frequently asked questions

Why does Xero show the invoice as paid if the payment bounced?

Xero records what you tell it. When you originally reconciled the payment, Xero marked the invoice paid. It has no way to know the bank rejected the transfer until you remove the payment manually — that's Step 1 of this guide.

Do I have to use a clearing account?

Technically you could reconcile both bank lines directly to the original invoice/bill account, but this creates messy double-entries that are hard to trace. A clearing account keeps the audit trail clean and makes it easy to confirm the transaction has been fully resolved.

What if the payment was bounced months ago and I only just noticed?

The process is the same — date doesn't matter. The main risk is that the invoice has been written off or the period is locked for GST/BAS purposes. If the original period is locked, talk to your accountant before removing the payment.

Can I reconcile a returned payment if the bank lines are on different dates?

Yes. The debit and credit won't necessarily appear on the same day — that's fine. Reconcile each line to the clearing account as they appear in your bank feed, regardless of date.

What's the difference between a returned payment and a refund?

A returned payment is a transfer that failed — the money went out and came straight back because the bank rejected it. A refund is an intentional decision to send money back to a customer or receive money back from a supplier. See How to reconcile a refund in Xero for the refund workflow.

The replacement payment covers multiple invoices — how do I reconcile it?

If the payer sends a remittance advice with the replacement payment, Remittance Go can read the document, match all invoices, and build the batch payment in Xero automatically. Alternatively, follow the batch deposit reconciliation guide to do it manually using Find & Match.