Clearing Small Balances in Xero

Jayde Wood

Modified on: Thu, 17 Jul, 2025 at 1:47 PM

This guide provides a comprehensive overview of how to manage and clear small outstanding balances in client and supplier accounts within Xero. Effectively clearing these minor discrepancies is crucial for maintaining accurate financial records, streamlining your reconciliation process, and ensuring your balance sheet reflects the true financial position of your business. Understanding these methods will help you avoid accumulated small amounts that can complicate financial reporting and audits.

Overview

Small discrepancies can arise for various reasons, such as rounding differences during payment, slight over/underpayments by clients, or unapplied credits from system migrations. While seemingly insignificant individually, these small balances can accumulate and impact the accuracy of your financial statements if not properly managed.

Key Considerations & Best Practices

There are Tax and Reporting implications. Due to the tax implications associated with clearing these balances, it is essential to consult with your accountant or bookkeeper to determine the most appropriate method for your specific business situation and to ensure compliance with Australian tax regulations. This guide outlines the technical steps, but the choice of accounting treatment should be professionally advised.

Periodically review your Accounts Receivable and Accounts Payable aging reports in Xero to identify and proactively clear any small outstanding balances. Maintaining clean client and supplier accounts across all integrated systems (Xero, Lightspeed, Vital) is crucial for accurate reporting and operational efficiency. Always be mindful of how actions in Xero might impact other platforms.
Maintain clear descriptions and references for all adjustments to ensure transparency and ease of auditing.
Once you establish a preferred method with your accountant for specific types of small balances, aim to apply it consistently.
Ensure all staff involved in financial reconciliation and invoicing are aware of these processes and the importance of adhering to the "one Poolwerx Way" for financial accuracy.

Prerequisites

Access to your Xero account with appropriate permissions (e.g., Adviser or Standard + Bank Accounts).
Understanding of basic Xero navigation.

Step-by-Step Instructions for Each Option

1. Clearing Small balances During Bank Reconciliation

Xero offers a convenient way to adjust minor differences when a bank statement line doesn't perfectly match a transaction due to rounding or human error (e.g., a client pays a few cents over/under the invoice total).

When using the adjustment feature in Xero, the invoice will be marked as 'paid' even with a slight underpayment. The payment status will also sync to Lightspeed and Vital, ensuring consistency across your platforms.

To create an adjustment

Select the relevant Bank Account from your Xero dashboard.
Find the relevant bank statement line that has the small discrepancy.
Match the transaction to the corresponding invoice.
Scroll down to section 3 of the reconciliation screen and click on the Adjustments dropdown.
Select your option and continue the steps as per the option selected.

Option 1: Enter Adjustment Using 'Bank Fee'

This option provides flexibility in choosing the account to which your adjustment is posted. Always consult with your accountant/bookkeeper for the preferred account to use for your business (e.g., Bank Fees, Cash Shortages and Differences).

Select Bank fee
Select Contact (the transaction will be linked to the contact record)
Enter Description for the adjustment (e.g., "Rounding adjustment for Invoice #xxx").
Select the account to put the adjustment (e.g., Bank Fees, Cash Shortages and Differences account)
Click Reconcile.

Option 2: Enter adjustment Using 'Minor Adjustment'

When you make a minor adjustment, Xero automatically posts a reconciliation adjustment to the built-in Rounding Account. There is no option to select an alternative account with this method. The rounding account is a Balance Sheet account and will need to be cleared periodically. Please consult with your accountant to ensure this account is cleared as part of your regular financial processes.

Select "Minor Adjustment"
Enter the Adjustment amount
Click Reconcile.

2. Clearing Small Credit Balances on Client Accounts

Small credit differences that could not be cleared during bank reconciliation may still exist. This can happen in scenarios such as:

Unapplied credits imported from NetSuite: These transactions impacted your Accounts Receivable (AR) and Accounts Payable (AP) balances at your Xero conversion date, necessitating their import.
Client overpayments: Where clients previously made overpayments, the majority of the balance has been applied to open invoices, but a small remaining balance persists with no further invoices to apply it to.

Where these small balances are not going to be refunded to the client or applied to future invoices, you can clear these them using the following options.

Option 1: Record a 'Refund' Using an Alternative Account

This method records a refund without actual money leaving your bank account. The nominated account must first be set to 'enable payments'. Click herefor instructions.

Navigate to the Credit (credit note, overpayment, prepayment) you wish to clear.
Scroll down to 'Make a cash refund' section
Enter Amount for the refund.
Enter Date of the refund.
In Paid From field, select the alternative account (as agreed with your accountant) that is enabled for payments.
Enter Reference (optional, but recommended for clarity e.g., "Small credit balance write-off")
Click Add Refund.

Option 2: Create an Invoice in Xero and Apply the Credit Note

This method involves creating a new invoice specifically to absorb the small credit balance.

Create an invoice in Xero, coding it to a relevant sales account (e.g., Miscellaneous Sales or a specific Clearing Account as advised by your accountant). The invoice amount should match the small credit balance you want to clear.
Apply the customer credit note to the newly created invoice.

CAUTION! Tax implications

Since this refund is not actually paid, using this method creates a "GST refund" that is not real eg. 10% of refunded amount. GST payments are rounded up/down to the nearest $1, so minor impacts of only pennies may not make much of a difference.

3. Clearing Small Debit balances (Invoice Still Awaiting Payment)

In the event that adjustments were not made during the bank reconciliation, and the invoice is still showing a small debit balance as 'awaiting payment', you can write these off using either of the below methods:

Option 1: Creating and Applying a Credit Note

This process is similar to writing off an invoice as a bad debt. The primary difference will be the account you select, depending on what was agreed upon with your accountant (e.g., Discounts Given, Bad Debts, Cash Shortages, Bank Fees).

Important Note: Credit notes created in Xero do not sync to Lightspeed or Vital. You will need to manually apply them in Lightspeed if the original invoice or related transaction originated there.

Option 2: Add Payment Using an Alternative Account

While credit notes in Xero do not sync to Lightspeed, adding payments to a Xero invoice does sync to Lightspeed. This makes this option potentially easier for clearing small balances, as it reduces manual intervention in Lightspeed.

To add a payment;

Navigate to invoice with the small debit balance.
Click Add Payment
Ensure the Date and Amount are correct
In Account field, select the alternative account as defined by your accountant (e.g., discounts given, bad debts, cash shortages, bank fees)
Enter a Reference (optional, but recommended for clarity e.g., "Small balance write-off")
Click Add

CAUTION! Tax implications

Since a payment is not actually received using this method, it creates a "GST paid" entry that is not real (e.g., 10% of the "paid" amount). GST payments are rounded up/down to the nearest $1, so minor impacts of only pennies may not make much of a difference. DO NOT use this option to write off large bad debts; it is intended only for very small, immaterial balances.

Related Guides & Next Steps

What's Next: Daily Sales Reconciliation Process
Deep Dive: Manage Bad Debts; Enabling Payments on a General Ledger Account
See Also: Current System Limitations; Essential Actions to Perform