You have decided to use Xero as your cloud-based accounting software, but how do you know things are working and you aren’t just making a mess of your accounts.
These 6 tips are what I use to confirm that Xero accounts are correct.
1. Reconcile all bank transactions
This is a simple step, but it’s surprisingly easy to miss, especially if you have multiple bank accounts or credit cards. If your dashboard shows that you have unreconciled transactions it could throw off the rest of these steps. Once all transactions are processed, you’re ready to move on.
2. Check your bank reconciliation
The bank reconciliation report explains the difference between your bank data feed and what is reported in Xero.
Having something in your reconciliations isn’t an issue on its own. For example, you could be running this report for a BAS at the end of the quarter, and you have recorded a payment made in Xero, but it doesn’t clear until after that date. This is no issue.
Common issues to look out for are transactions dated incorrectly or recorded incorrectly.
An indication you have recorded transactions incorrectly is payments for invoices being allocated to the invoice, but when allocating the bank transaction, it is coded directly to the income account. This may happen if your customer pays multiple invoices as one lump sum or part payments for invoices. This can also be identified in the next step.
3. Review Accounts Receivable
This is a good time to check two things and to do so I would access the Aged Receivables report. This report indicates what is owed to you and how long it has been outstanding.
Firstly, that you have been getting paid the amounts owed to you. If you haven’t been paid this is a great time to follow up with your customers or consider if you need to write off any outstanding amounts as bad debts
The second check is that when you have been paid you have recorded transactions correctly. This is an area I have seen people make significant errors in their accounts. A common error is that amounts invoiced in Xero aren’t recorded as paid when received through the bank and instead coded as income again. This is particularly easy to do if you receive part payments for invoices or multiple invoices as one batch payment.
If you are raising invoices in Xero (and you should be), another way to check this issue is by reviewing your income transactions to check that the source is always a “receivable invoice” and not “receive money”. The latter would indicate that the income transaction was recorded directly from the bank account.
4. Review Accounts Payable
You should access the Aged Payables report to check what amounts you have outstanding. This report indicates what you owe and how long it has been outstanding.
Use this report to check that you haven’t missed any payments or incorrectly recorded the dates on any bills.
A great resource to help manage this in Xero is Hubdoc. If you aren’t already using this to keep track of your bills you should check it out. It allows you to easily manage your accounts payable and digitally file your invoices.
5. Agree Wages and Superannuation to your financials
If you are recording your payroll In Xero, it will automatically create the expense journals when you post the pay run. A common error is that the payments made for wages and super are then treated as an expense again.
I reconcile the Payroll Employee Summary to the Profit and Loss and the Balance Sheet to check that expenses are accurate and that the amounts paid have been recorded correctly against the payable accounts. If you notice your wages or super payable accounts are always increasing (and you are paying them) then this could be your mistake.
Use this check to ensure that you are making your super payments for your employees.
6. Check your GST, PAYG Withholdings Payable and Income Tax Payable accounts
This can be a harder area to reconcile unless you are a tax accountant or bookkeeper. Due to that I am only focusing on one particular transaction and that is the BAS payments or receipts. A common error is to record the entire event as solely one account or the other, when it should be recorded for each component.
To do so when the transaction occurs in your bank account instead of matching to one account you can select “add details” and post a line-by-line breakdown.
Wrap Up
Now you have been through these areas which often cause errors you can be confident your Xero accounts are up to date. It doesn’t mean everything is perfect, but it’s a great start.
If this was confusing, overwhelming or you just simply don’t want to do it yourself, then please contact Bell Accounting WA and we will be happy to assist.
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