Adelaide bookkeepers working together on graphs for clients

What is reconciliation? Reconciliation in a bookkeeping sense means ensuring that two sets of records are in agreement – that the books balance. In layman’s terms, this means ensuring what you have on Xero matches reality.

In a manual system, you would check that the paper bank statements match with what you have on your software, which can be a long and painful process. Not only this, but you would always be playing catch up – waiting for your statements to arrive in the post, waiting for cheques that were in the mail, and then having to query expenses that were perhaps months old.

Xero’s bookkeeping answer to this problem is something that is simple to use, quick and intuitive. Using features such as the live bank feeds and bank rules and add-ons such as Receipt Bank, the whole process can become pretty much automated.

The Reconcile page is well laid out, easy to follow and powerful in function and performance. In this blog post we will run through Xero’s bookkeeping Reconcile feature so that you can get your books balanced and therefore have real time insight into your business’s performance and cash position.

It’s worth taking a step back for a moment and thinking: what type of bank account do we have and what do we use the account for? There are different types of transactions that go through our bank accounts and depending on what the transaction is, the treatment may be different.

For example, in your business you may have the main day-to-day business account, which would be where you receive your income from customers, and where you pay out purchases and wages.

You might also have a company credit card, which you can also set up a bank account for on Xero. In this account you would have expenses paid off, such as travel, entertaining and office expenses. This account should balance off to zero each time the balance is paid off.

Lastly, you may have a savings account or term deposit account. This may be a high interest account where you hold retained earnings. Aside from money transferred in and out from the day-to-day account, you may receive interest payments.

Whatever the bank type, when you click ‘Reconcile’, you will go to the main Reconcile page. Down the left side of the screen will be the items that Xero bookkeepers have on its records (either from the bank feeds or from statements you have imported). On the right side is where you choose how to treat these transactions in Xero.

At first the right hand side may be blank. But once you have been using Xero a while, have your invoices and purchases up to date and have set up your bank rules, you will find a lot of the transactions automatically match up, meaning you just need to click OK to confirm they are OK.

The left hand side will have information relating to the transaction as it has been received by Xero. The information will depend on what instructions the payee gave and what information was imported to Xero. Therefore it is important you include as much information as possible when importing statements.

As I mentioned in my last blog, Setting up a Bank Account, you definitely want to have a description or reference for each transaction as well as the date and amount, otherwise you may find reconciling quite challenging.

Xero offers four options when it comes to reconciling each transaction: Match, Create, Transfer, and Discuss.

Match is where you match the transaction to a sales invoice or purchases bill that you have previously entered onto Xero. It is important to match these rather than creating a new sale or purchase so that you can track which customers have not paid and also to help with budgeting and cash flow forecasting – seeing what is outstanding in terms of payables and receivables.

We will go over creating sales invoices and purchases bills in upcoming blog posts. For now I will assume that the invoices are already on the system, in which case one of two things will happen:

  1. If the invoice exactly matches the amount paid, the right hand box will be green. If it is the correct invoice, you just tick the OK box and the transaction will be reconciled. Note that if there is more than one possible match there will be an option ‘X other possible matches found’, in which case you can click and see the other items. This will happen where you have, for instance, regular monthly or weekly payments and are reconciling over a long period of time or where you have customers being billed the same amount.
  1. If no invoice matches the amount paid, you will need to click Match and then click Find & Match. Xero pulls up a list of all unpaid invoices and you can choose the appropriate invoice(s). If the invoice is a part payment, click the Split option and type in the amount paid off the invoice.

Create is where you have transactions on Xero that are not invoiced sales or purchases that you need to create bills for, and that are not transfers to or from another account (such as your savings or credit card account).

Common examples would be bank interest and bank charges, utility bills, debit card payments – anything where you do not have the receipt and where the purchase was not made on credit.

When you click Create you then fill in Who, What and Why. Who – the name of the supplier. What– choose a heading from the chart of account. Why – a description of the purchase or occasion (e.g., ‘business meeting with client X’).

This is fine for simple purchases, but if the transaction is more complex, you should click Add Details. You can then split the purchase, set the tax rate and even import a copy of the receipt. We will cover this more in the blog posts on sales and purchases.

Transfer allows you to transfer funds from one account to another. You can only transfer between the bank accounts you have set up on Xero, and you need to select the right bank accounts, but it is very simple with a drop down menu. Just make sure you can identify which account is which from your bank statements – as on the bank statement you normally just see the account number. I usually include the last four digits of each account at the start of the account name in Xero, e.g., 1234 Business Account and 5678 Savings Account, so when I see a transfer from account 10105678 I know that money has come from the savings account.

The last box we will look at is the Discuss box. This is where you and your bookkeepers can leave notes for each other, which will then show up. If you are unsure of something you can make a note and your bookkeeper can advise you on how the item should be treated. It is a great function that can save time and help clarify any queries.

Please stay tuned for part two where we will cover bank rules and cash coding.