Reconciling the bank from scratch – Performance Accountancy – MTD

If you are using the cash basis, one of the most important things you need to do in Xero is reconcile your bank account properly. Your business bank account might be an actual business account issued by the bank, or it might be a personal account that you have clearly set aside for business use. Either way, the process is based on clearing every line that has come through on that bank statement.

You cannot look at a transaction and think, ‘That was personal, so I will just delete it from the bank feed.’ That is really not a good idea. At the end of each month, you want to be able to check that the bank balance in Xero agrees to your actual bank account. You can only do that if the transactions in Xero match what actually happened in the bank.

If you start deleting bank feed lines because they feel inconvenient, you will have no realistic way of reconciling the account properly. You also make it much harder to spot whether anything has been missed. Sometimes Xero and the bank feed have a bit of a hissy fit. A day might be missed or duplicated. Most of the time it is stable, but it can happen, and the only way to spot it is to keep the bank feed complete and check it against the real bank statement.

In this video, we are going to look at how to reconcile the bank from the dashboard. From the dashboard, click into the bank account. Xero will usually take you to account transactions first, but you will also see bank statements and the reconciliation tab. Some users may also see cash coding, but that is normally for advisers rather than general client use.

The reconciliation tab is where you will find everything that has come through the bank account but has not yet been matched or coded. Because we are looking at cash coding, most transactions will not have an automatic match. However, where you have already raised invoices, Xero may be able to suggest a match. When it does, it will show the match in green.

Even when Xero suggests a match, you still need to check it. If you regularly receive identical amounts, Xero can occasionally match the payment to the wrong invoice or the wrong month. Do not simply click OK without checking. Make sure the payment is being matched to the correct invoice before you reconcile it.

For income that has not been invoiced, you can code it directly from the bank feed. For example, if a student has paid you for singing lessons and you did not raise an invoice, you can enter the payer’s name as the contact. If the contact does not already exist, Xero will create it. You then choose the correct income category, such as private teaching income, and add a short description such as ‘singing lesson’.

Be careful with descriptions. Xero can suggest previous entries in future, which is useful, but it will reuse the wording you have entered. If you write something very specific such as ‘February singing lesson’, Xero may suggest that same wording again in March or April. A more general description such as ‘singing lesson’ is often more useful.

The same principle applies to expenses. For example, a British Airways payment can be coded to travel. You might be tempted to write ‘flight to  Cologne’, but if you use British Airways regularly, Xero may suggest that every British Airways transaction is for Cologne. A general description such as ‘flights’ is usually more helpful.

For overseas taxis, hotel accommodation and subsistence, you can set up simple contacts or descriptions that make sense, such as ‘miscellaneous taxi, ‘Marriott’ or ‘miscellaneous food’. The important thing is to code each item to the correct expense category, such as international travel or subsistence. If you are VAT registered, remember that VAT on overseas costs cannot normally be reclaimed on the UK VAT return. Training costs can also be coded from the bank feed.

For example, if you have taken a vocal lesson, you can create the contact for the teacher or studio and code the cost to training. If you have hired a rehearsal studio, you can code it to rehearsal venue or studio hire. The aim is not to overcomplicate things, but to make sure the accounts tell the right story.

Sometimes a cost has both business and personal use. A mobile phone bill is a common example. If you only claim 70% of the bill for business, you can add transaction details and split the payment into two lines. The business part goes to telephone and internet, and the personal part goes to owner’s drawings. Owner’s drawings is where personal spending is recorded; it is not treated as a business expense.

Once you have split a recurring transaction, Xero will often remember the treatment next time. When the next EE bill appears, it may suggest keeping the two-line split. You still need to check it, but it can save time once the pattern is set up correctly.