Creating bank rules in Xero – Performance Accountancy – MTD

Reconciling the bank manually in Xero can be a bit laborious. It does help that Xero remembers where the last transaction was posted, but we can make life much easier by creating bank rules. Bank rules still need checking, but they can save a lot of repetitive work. Start by going to the bank account and opening the reconciliation tab. In this example, there are still 88 transactions to reconcile, and some of them are recurring direct debits or standing orders. That is where bank rules become useful. From the bank account, go to Manage Account and then Bank Rules. Bank rules are split into three types: spend money rules, receive money rules and transfer money rules.

In this example, I am only looking at spend money rules and receive money rules, because there is only one bank account in Xero. If there are transfers to a personal account or to a savings pot outside Xero, those would usually be treated as owner’s drawings and coded to 980. First, create a spend money rule. You can decide whether any condition needs to match or whether all conditions need to match. In this example, I am using a condition where any text field contains the word Equity.

You can set the contact to Equity if the contact already exists. If it does not, you can either create it or tell Xero to take the contact from the payee shown in the bank feed. You then decide how the transaction should be split. For a straightforward Equity subscription, 100% of the payment goes to subscriptions, with no VAT. The description can be Equity subscription, and the reference can usually be set from the bank reference or description. You can choose whether the rule applies to all bank accounts or only to a specific bank account. In this demonstration, I apply it to the test bank account and name the rule Equity sub. Once saved, Xero can suggest that treatment when similar payments appear in the bank feed.

Next, create a Spotify rule. Spotify can be allowable if it is used for business purposes, such as research, repertoire or professional learning. However, if you are paying for a partner, family member or household plan, it may not be 100% business. There may be personal use.

For the Spotify example, the rule is based on any text field containing Spotify. The payment is split 50% to research, such as theatre, TV or cinema research, and 50% to the owner’s drawings for the personal element. There is no VAT in this example. The rule is then saved against the test bank account and named Spotify. The advantage of setting the rule up this way is that, if your Spotify plan changes in future, you can amend the percentage from that point onwards. Another example is Xero itself. You may pay Xero monthly, but that does not mean it should be coded to subscriptions. It is paid on a subscription model, but the purpose of the cost is for the software. So the bank rule should code 100% of the Xero payment to software, not to professional subscriptions.

You can also create and receive money rules. For example, if you receive PPL royalties, create a receive money rule where the text field contains PPL. The contact can come from the payee, the description can be PPL royalties, and 100% can be coded to royalty income.

If withholding tax appears on a royalty statement, deal with that separately. For small amounts, you may initially code the receipt to royalty income and then amend the allocation once the PPL statement has been reviewed.

The same approach can be used for PRS royalties. Create a receive money rule where the text field contains PRS, set the description as PRS royalties, and code the receipt to royalty income. Save the rule against the relevant bank account.

Once the rules have been created, return to the bank reconciliation screen. Xero should start suggesting the rules against matching transactions. You can view the details of the rule, choose not to apply it, or accept it if it is correct.

Sometimes, if the contact was not already set up when the rule was created, Xero may still ask you to enter the contact name the first time you apply the rule. Once you have added the contact, you can go back into Bank Rules, edit the rule, and set it to use the existing contact. For example, you can edit the Equity, Spotify or Xero rule so that the correct contact is used automatically next time.

In an ideal world, all the contacts would already have been set up at the beginning. In reality, that can take a lot of time. It is perfectly workable to create the rule, reconcile one transaction, and then go back and amend the rule once the contact exists. After that, future transactions should be much quicker. For example, the next Xero payment should appear with the correct contact, description and software category already suggested. You still need to check that the rule is correct before clicking OK, but it removes a lot of repetitive coding.