Part 6 - Bank Reconciliations

This follows on from Part 5 - Purchases in Xero.

A bank reconciliation is just a fancy way to say ‘check if everything is in order’. What you’re doing in a bank reconciliation is checking that all the money that has come in and out of your bank account matches what you’ve been putting into Xero.

Why is that important? Imagine if $60,000 came out of your bank account and you didn’t reconcile. You wouldn’t know wouldn’t pick up whether it was a legitimate transaction or not. Reconciling helps to pick up errors in transactions in Xero, but also helps to check transactions going in and out of your bank account. Cash management is important (it’s the lifeblood of a business) and reconciling your bank is something that should be done!

Reconciling to the bank account or bank accounts is something you do when your transactions are in. It’s like the conclusion of a transaction. So when you sell something:

  • You’ll invoice your customer
  • Your customer will (hopefully) pay
  • That payment gets noted into Xero
  • You’ll reconcile the payment with the cash amount that comes into your bank account.
  • A reconciliation ‘concludes’ a transactions. So well done, you’re reaching the end :smile:

Fortunately, Xero makes bank reconciliations quite easy.

Here’s the short cut to reconciling your bank account in Xero.

  1. Go to your home dashboard, this is the first screen you should see when you log into Xero.
  2. Click on the “Reconcile # Items” button of the bank account that you want to reconcile (you may have many bank accounts to reconcile your transactions to or just one) This is a blue button and the # represents a number.
  3. You should reach a screen that looks like the below. This is the reconciliation screen.
  4. You now have a few options with reconciling and I’ll go through some of them:
    • Magic matching - can you see the green highlighted transactions on the right hand side of the above picture? They’re transactions that have been matched for you by Xero. Xero may match invoices, bills and payments for reconciliation. If you’re happy that they’ve matched it correctly for you - click the “OK” button to reconcile the bank cash flow with your Xero transaction. You’re done for the first one, then continue on for all of your transactions.
    • Manual checking - Some of your transactions may not be automatically matched, in such a case, if you think that an invoice or invoices do exist for it (it might but it could be the wrong amount or there could be multiple invoices for that one payment of cash):
      • Click on the magnifying glass with “Find & Match” located on the top right hand side of each transaction in the reconciliation pane.
      • You’ll be brought to a screen where you can find and select matching transaction for that bank cash amount. You have a few options here depending on what your needs are:
        • One invoice to payment in bank but out by a few cents or dollars - Select the invoice to which the payment relates, scroll down a little bit until you see the “+ Adjustments” button and click that. You can make an adjustment amount for a bank fee or minor adjustments. Click on either one and then add in the details. Minor adjustments can be common e.g. if you are invoicing with GST, this might put your invoice a few cents out and someone might pay a rounded up amount. Click “Reconcile” when you’re done. Your invoice/bill/payment will be reconciled to the bank and any adjustments/bank fee will go to their respective accounts.
        • Many invoices to one payment in bank - Sometimes, you’ll get one big payment that relates to a whole bunch of invoices. Select the invoices that that payment relates to and then click “Reconcile”. See the picture below.
        • Part payment or deposit of an invoice/bill - If people partly pay your invoice or make deposits, select the invoice to which it relates and when that invoice/bill is highlighted in green, there should be a blue link called “Split” next to the amount. Click on that and fill in the details. Click “Split” and then “Reconcile”. Xero will reconcile the part payment to your invoice/bill and you can reconcile the remaining balance of your invoice later.
    • Create - If you don’t think the invoice/bill exists in Xero you can always create a transaction to reconcile to your bank cash ins and outs. When should you use this? This should really only be used for small amounts like bank fees and bank interest where it’s not really practical to create an invoice for. To create a transaction, click on the “create” tab and then fill in your details as if you were creating a mini invoice/bill and then click “OK”. This will create your transaction and click “OK” to reconcile it. See the picture below where I’ve created a bank fee transaction.
    • Transfer - Sometimes you may transfer amounts between your bank accounts. E.g. if you wanted to pay your credit card, you can transfer the money on internet banking and you can also record the same in Xero. To do a transfer, click the transfer tab and select a bank account from the options available. When you’re done, click ok. You’ll also need to go into that other account, e.g. credit card and then match it with the transferred transaction in the credit card bank reconciliation.
    • Discuss - if you can’t reconcile the item for some reason of other such as invoice wasn’t originally created and it should have been, click on the “Discuss” tab and then write a note for it to be revisited at a later point by your accountant.

Fixing up Errors & Why is My Bank Reconciliation Not Reconciling

If you need to unreconcile a bank transaction or remove & undo a bank transaction

  1. Go to Accounts > Bank, click “Manage Account” on the bank account where the reconciled transaction exists, then click “Account transactions”
  2. Find the transaction and click on it.
  3. On the top right hand side of that transaction, click “Options” and click “Unreconcile”. If you want to delete a transaction, you’ll need to click “Remove and Redo”. The unreconcile just removes the association between the transaction in Xero and the bank ins/out while the “remove and redo” deletes it.

Sometimes there may be differences between the end amount in Xero and your bank balance, even after reconciling, in any case, here’s what you can do to resolve the difference:

  1. Refresh the bank feed to make sure you’re getting all the transactions. Are there any issues with your bank feed and the statements from your bank account?
  2. Reconcile any outstanding transactions. Are all transactions reconciled?
  3. Find out what the difference is between the bank balance and the Xero balance and does that amount relate to anything that you know of?
  4. Go to Settings > General Settings > Conversion balances to make sure that your opening bank balance is correct.

Looking at Your Bank Statement in Xero and Bank Account Transactions

If you want to look at your bank account lines and bank statement, go to:
1. Accounts > Bank Accounts.
2. Click on “Manage Account” for the bank account in question.
3. Click “Bank Statements” - you can see your statements in there.
4. If you want more detailed account transaction, just click the tab “Account Transaction” and then you can view transactions.

That’s a wrap for bank reconciliation. If you want to expand your knowledge about things related to bank reconciliations, feel free to check out:

Otherwise, well done! You’ve finished the beginner’s guide to using Xero Accounting.
You’ve learnt to set up Xero, you’ve created invoices, created bills (and a whole heap of stuff in between) and learnt to reconcile them.

You’re now ready to start doing your own transactions in Xero! If you want further your Xero prowess, move onto the Intermediate Guide to Using Xero Accounting - Part 1 - Introduction

Next: Set up Your Inventory In Xero - What is Inventory, When to Use it and How to Use it

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