If someone asks the average 'person in the street' what bookkeeping is, they may well have images of dusty ledgers, Dickens characters writing with quill pens and pages of tiny handwritten numbers being laboriously added up and checked manually.
Double-entry bookkeeping may have been invented in 14th century Italy, but things have moved on a LONG way from the days of paper ledgers. The numbers may now be digital, but the basic accounting principles are still central to all bookkeeping systems, including modern cloud accounting software like Xero.
There are several key accounts in your Xero system (which are usually shown as locked accounts and are referred to as 'system accounts' in Xero-speak) that enable different areas of data to be controlled.
The most obvious control account is sat right there in your Xero Dashboard, and that's your bank account – and it's associated live bank feed.
When you reconcile the bank in Xero you're reconciling a control account. But the problem is that the big green tick and 'Great job!' message Xero flashes up doesn't actually mean that the bank balance is right – although you'll assume that's the case.
So, how can this be?
How Xero reconciles your bank transactions
Xero is designed to be an incredibly user-friendly piece of software. So the process of marking your sales invoices and purchase invoices as paid is quick and easy to do – something you'll do regularly in order to know which items have, or haven't, been paid.
By doing this, Xero produces figures that could be different to the items that come through from your bank feeds and are not matched. The bank entries may then be posted somewhere else to reconcile the bank account.
There's also a facility in Xero to mark account transactions in the bank account as reconciled. Again, these could be different to the items that come through on the bank feed. On top of this, it's also possible to delete transactions – albeit for a good reason – that again can result in differences between your Xero balance and your bank balance.
A very common occurrence could be a break in the bank feed. If your bank feed drops, for whatever reason, you may reconcile all of the entries that appear in Xero, but will have an incomplete list of bank transactions because of the break.
So, as you can see, even though that green tick has appeared, there's always the possibility that your Xero balance and bank balance may not agree.
Managing your other control accounts
The next two main control accounts are your Accounts Receivable and Accounts Payable.Although Xero restricts what you can do with these accounts, it's still possible that your list of Aged Receivable and Aged Payables may not reflect the true position. For instance:
- Settlement discounts given and received may not have been recorded.
- Prepayments have not been allocated.
- Cash payments and receipts have not been recorded.
- Bad debts have not been written out of the ledger.
There are several other control accounts in Xero that it's important to be aware of – and to know how they can affect and influence your main Xero balance:
- Wages control – Journals should be posted automatically from your payroll function within Xero or from a Xero App, but problems can sometimes arise with:
- Cash advances and loans to staff.
- Payments to casual staff not processed through the payroll software.
- PAYE & NI – Again, journals are posted from the payroll software but Xero, for instance, has only recently automatically posted the Employment Allowance. Other software may not post these correctly. It's also worth checking that your statutory sick pay (SSP), statutory maternity pay (SMP) and student loan deductions are being accounted for correctly.
- VAT – Although inputs and outputs will be posted to the VAT account automatically, it's always possible that you'll choose the wrong rate. Real care is needed when correcting these errors to make sure the corrections are included in your next VAT return. You'll also be making payments to HMRC for a number of other different taxes and these could be posted to the wrong account, and interest on late payment of tax may not be accounted for correctly.
So, it's clear that knowing how your control accounts behave – and where the potential discrepancies can occur – is a big part of running Xero and making sure you're in real control of your accounts.
Talk to us about your perfect Xero system
Xero is a fabulous solution for managing your accounts and finances. But your Xero numbers will only tell you the genuine truth if you're aware of your control accounts, and how potential discrepancies can creep into your Xero balance.
At Bespoke, we're a certified Xero Partner and can work with your business to create a Xero system that's intuitive, transparent and set up to deliver the best real-time view of your business finances – with your control accounts working like clockwork.
Get in touch and let's have a chat about making your Xero accounts deliver the accurate numbers you need to make those big business decisions.