Setting Up Xero New Chart of Account – MTD from Performance Accountancy
In this video, we are looking at how to set up a new account code within the chart of accounts. We are not rebuilding the whole chart of accounts; we are simply adding one new account where one is missing.
A chart of accounts is like a filing cabinet. It is the structure that tells Xero where to put your income, expenses, assets, liabilities and other accounting entries. If you came through Performance Accountancy and we set up your Xero before you started using it, we would normally have loaded a musician and performer chart of accounts for you.
If you used the default Xero setup, your chart of accounts may not be particularly relevant to your work. It may include categories designed for general businesses, rather than for musicians, performers or teachers. We can usually improve it, but if you have already coded a large amount of information, changing the structure later can become a bit of a pain.
The example in this video is withholding tax. In the chart of accounts I had loaded for the demonstration, I had not
included a specific account code for withholding tax. If you perform overseas, you may need one.
From the dashboard, go to Accounting, then Chart of Accounts. This opens the list of account codes currently available in Xero.
To add a new code, click Add Account. We need to make sure that withholding tax does not get included as an expense in the quarterly updates to HMRC. For that reason, we are not putting it into the normal income or expense ranges. In this example, we set it up as an equity account.
For the code, use 985 if it is available. In the video, Xero confirmed that the code was available. I called the account
Withholding tax deduction.
The description should explain what the code is for. For example, this is the withholding income tax deducted from overseas work. It does not include social security payments, but it can include solidarity tax in Germany, where that forms part of the foreign tax deduction.
Once the account has been created, it becomes available for use when recording overseas income and the foreign withholding tax is deducted from that income.
As a quick overview, the 200 range in this chart of accounts is used for income or revenue. The 300 range is generally for direct costs, such as musicians and deputies, agency fees, exams and other costs directly connected to the work.
The 400 range is used for general overheads. These are the everyday costs of running the business, such as postage, stationery, telephone, professional clothing, grooming, props and similar business expenses.
There are some areas that need care. Motor costs and mileage are both available in the chart of accounts, but you would normally use one method or the other, not both for the same vehicle use.
There is no salary category for the self-employed person’s own drawings. You are not paid a salary as a sole trader. Salary categories are only relevant if you run payroll for employees. Employer’s National Insurance also relates to employees, not to the sole trader personally.
Pension contributions and charitable donations may be entered if they come out of the business bank account, but they are normally adjusted as part of the year-end process rather than treated as ordinary trading expenses.
The 600 range is for current assets, and most clients will not need to worry about those on a day-to-day basis. The 700 range is for capital equipment. For example, if you bought a new Clavinova for £3,000 and were using traditional accounting, it may go into the 700 range. If you are using the cash basis, smaller equipment and instruments are often posted differently, such as to the small equipment code.
The 800 range is for debts and liabilities, and the 900 range deals with equity-type balances, such as money introduced, drawings and items like the withholding tax account we have just created.
That is a quick overview of the chart of accounts and how to add a new account code. If you get stuck, we can set up the code for you.