Before You Begin

This guide assumes you have a Xero account and experience with invoicing and bank reconciliation. Familiarity with your payment processor’s dispute process is also helpful.

Overview

20 min
Setup Time
Intermediate
Difficulty
As Needed
Maintenance

What You’ll Learn

  • How to prepare Xero accounts for chargeback entries
  • Recording chargebacks, dispute fees, and reversals
  • Handling both won and lost dispute scenarios
  • Reconciling chargeback-related bank feeds in Xero

1. Preparation Steps

Before recording disputes, ensure these accounts are set up or ready in Xero:

Required Accounts

  • Chargeback Expense (Expense)
  • Dispute Fees (Expense)
  • Sales (Income - the original revenue account)
  • Bank Account (the one receiving/sending payments)

Optional (but recommended)

  • Chargeback Liability (Current Liability - for disputes in progress)
  • Customer Refunds (Expense - for direct refunds, distinct from disputes)

2. Understanding Chargeback Types

There are generally two ways payment processors handle chargebacks.

Method A: Immediate Full Reversal

This occurs when the payment is immediately pulled back, usually with a fee.

Pros:
  • Simple accounting.
  • Directly reduces cash.
  • Clears original invoice.
Cons:
  • No chance to dispute.
  • Immediate revenue loss.
  • Dispute fees often separate.

Method B: Dispute with Investigation Phase

The funds are held, and you have an opportunity to present evidence.

Expert Tip: For most e-commerce businesses, payment processors like Stripe or PayPal initiate a “dispute with investigation.” This allows you to fight fraudulent claims and potentially retain revenue. It’s crucial to track the status of these disputes carefully.

3. Step-by-Step: Recording a Lost Dispute

Here is the recommended workflow for accounting for a chargeback when you lose the dispute.

Here is a sample code block to show how a payment reversal notification might look from an API.

{
  "transaction_id": "ch_XYZ123ABC",
  "type": "chargeback",
  "status": "lost",
  "amount": -100.00,
  "currency": "USD",
  "original_invoice_id": "INV-2025-001",
  "dispute_fee": -15.00
}

4. Detailed Workflow in Xero

  1. 1

    Create a Credit Note (or Direct Adjustment)

    If an invoice exists, create a credit note against the original invoice to reverse the sale. If no invoice, record a spend money transaction.

  2. 2

    Record the Chargeback Expense

    Allocate the credit note or spend money entry to your “Chargeback Expense” account. Ensure sales tax is also reversed correctly.

  3. 3

    Account for Dispute Fees

    Record the dispute fee as a separate “Spend Money” transaction or allocate it from your bank feed to the “Dispute Fees” expense account.

  4. 4

    Reconcile Bank Feed Entries

    Match the credit note (or spend money) and the dispute fee against the incoming chargeback debit from your payment processor in your bank feed.

Common Error: Forgetting to Reverse Sales Tax

When reversing a sale due to a chargeback, ensure you also reverse any associated sales tax through the credit note or adjustment to avoid overstating your tax liability.

5. Testing and Reconciliation

Review Checklist

  • Confirm original invoice is updated or credit note issued
  • Verify chargeback expense account is correctly debited
  • Check dispute fees are recorded to the correct expense account
  • Ensure bank reconciliation matches actual payment processor payouts

Need Expert Assistance?

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Navigating complex chargeback scenarios can be tricky. Our Xero experts are here to ensure your books stay accurate and compliant.

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