Accounting Instruction, Help, & How To (Financial & Managerial)

Welcome to the exciting world of Xero accounting software! In this blog, we will delve into the process of receiving payment deposits from invoices using Xero’s powerful features. By mastering this aspect of Xero, you can elevate your accounting skills and become an accounting hero in 2023. So let’s get started!

Setting Up Your Custom Xero Homepage: To begin, access your Xero account and navigate to the new company file that you previously set up. Once there, let’s customize your Xero homepage to make it more efficient for your needs. We’ll duplicate some tabs to accommodate various reports. Follow these steps:

1. Right-click on the tab at the top of the screen and select “Duplicate” to create a copy.
2. Repeat the above step to duplicate the tab again.
3. Go back to the middle tab and click on the drop-down menu at the top. Open the “Balance Sheet” report.
4. Now, move to the tab on the right and click on the accounting drop-down menu. This time, open the “Income Statement” or “Profit and Loss” report.
5. Return to the first tab, and we’re ready to proceed with the payment deposit process.

Understanding the Invoice Payment Flow: Before we delve into the specific steps in Xero, let’s briefly understand the payment flow for invoices. The flowchart below illustrates the typical accounting and sales cycle.

[Insert QuickBooks Desktop flowchart image here]

Note: The sales cycle may vary depending on your industry. In simpler industries, such as collecting revenue from YouTube, you may record revenue directly through bank feeds. However, if you have a cash register or a more complex system, additional steps are involved to maintain internal controls and reconcile cash.

Receiving Payments for Invoices in Xero: In Xero, the process of receiving payment for invoices is similar to depositing funds. Depending on your situation, the steps may vary slightly. Let’s explore different scenarios:

1. Basic Scenario – Single Payment per Invoice: If you expect a single payment for each invoice, you can easily record the payment as a deposit into your checking account. Here’s how:
   • Create an invoice and send it to your customer.
   • When the payment is received, record it as a deposit into your checking account.
2. Complex Scenario – Grouped Payments or Intermediaries: In more complex scenarios, multiple invoices may be paid together, or you may receive payments through intermediaries such as credit card companies. To handle such situations effectively, consider the following approach:
   • Set up an intermediary clearing account (another checking account) to temporarily hold the funds.
   • When payments are grouped and deposited into your bank account, transfer the funds from the clearing account to the checking account to match the format on your bank statement.
   • This ensures your books reflect the same grouping as your bank statement, simplifying the reconciliation process.

Adding a Clearing Account in Xero: To implement the above approach in Xero, let’s add a clearing account to your chart of accounts:

1. Click on the Accounting dropdown menu.
2. Select “Chart of Accounts” to view your account list.
3. Add a new account, categorizing it as a bank account.
4. Name the account as your clearing account, indicating its purpose as a temporary holding account.

Integration with Bank Feeds: Xero offers bank feeds to automatically import transactions from your bank account. Depending on your preference, you can choose to wait until payments clear the bank before matching them to invoices. This integration streamlines the reconciliation process.

Understanding Complex Payment Scenarios: In some cases, receiving payment deposits for invoices can become complex, especially when multiple invoices are paid together or intermediaries facilitate the payment process. It’s important to carefully consider how bank feeds fit into your invoicing system, as invoices typically involve non-cash transactions. While we’ll explore bank feeds in detail in a separate section, let’s focus on adding a clearing account in Xero to streamline the payment deposit process.

Adding a Clearing Account in Xero: To better manage grouped payments and facilitate the matching of bank statements, we’ll create a clearing account. Here’s how:

1. Access your Xero account and go to the Accounting dropdown menu.
2. Select “Chart of Accounts” to view your existing accounts.
3. Click on “Add Account” to create a new account.
4. Choose the account type as “Bank Account” and name it appropriately (e.g., Clearing Account, Undeposited Funds, Funds to be Deposited).
5. Assign a code or account number for easy reference.
6. Save the account and continue.

Recording Payment Deposits from Invoices: Now that we have our clearing account set up, let’s proceed with recording payment deposits for invoices in Xero.

1. Navigate to the “Invoices” section or tab in Xero.
2. Locate the invoices awaiting payment.
3. Select the invoice for which you have received payment.
4. In the invoice details, click on the “Receive Payment” option.
5. Fill in the necessary information, such as the amount paid, payment date, and the account where the payment will be deposited.
6. If you have multiple invoices to receive payments for, you can check them off and create a batch deposit to streamline the process.
7. Once you have filled in the details, save the payment.

Using the Clearing Account for Deposits: When recording payment deposits, ensure that you allocate the deposit to your clearing account. This will increase the clearing account balance while decreasing the accounts receivable balance. If you have multiple invoices or sales receipts to group together for deposit, the clearing account acts as a temporary holding account until the funds are transferred to the checking account.

Accounting for Accounts Receivable and Clearing Account: When receiving payment deposits, it’s important to note that accounts receivable will decrease in the sub-ledger for the specific customer. Let’s take a closer look at how Xero handles this process.

Recording and Verifying the Deposit: After entering the payment details, proceed with making the deposit. Then, update the balance sheet to ensure accurate reporting. Check the clearing account and accounts receivable to verify the impact of the deposit.

Using the Aged Receivable Summary Report: To track accounts receivable, consider generating the Aged Receivable Summary report. This report provides a breakdown by total and customer, allowing you to easily reconcile the balance with the accounts receivable balance on the balance sheet.

Tracking Payments in Xero: Xero offers multiple methods for tracking payments. Here are a couple of options:

1. Accessing Invoices:

• Go to the “Business” dropdown menu and select “Invoices.”
• Locate the paid invoice within the “Paid” section. This area reflects invoices that are no longer awaiting payment.

2. Utilizing the Contacts Feature:

• Click on the “Contacts” dropdown menu and select “Customers.”
• Find the customer’s profile, such as Anderson Guitars or Jones Guitars.
• Inside the customer’s profile, you can view detailed information about their invoices, including their status (approved or paid).

Understanding the Clearing Account Concept: While it may seem redundant in our example, the clearing account is essential when dealing with various payment scenarios. It serves as a temporary holding account for payments that are not directly deposited into the checking account. The clearing account allows you to track payments before transferring them to the appropriate accounts.

Batch Deposits and Clearing Account: If you have multiple payments or invoices grouped together, Xero enables you to create batch deposits. This feature simplifies the deposit process and ensures accurate record-keeping. By selecting the invoices you wish to deposit together, you can streamline the payment process and maintain better control over your financial data.

Handling Multiple Payment Forms and Clearing Account: When dealing with cash and other payment forms that need to be deposited together with items in the clearing account, it’s crucial to address any potential grouping problems that may occur during the deposit. Let’s examine this concept more closely.

Updating Accounts Receivable: After recording the payment deposit, ensure that accounts receivable accurately reflects the decreased balance in the sub-ledger. You can verify this by updating the aging account, which will now reflect the revised balance tied to the accounts receivable line item on the balance sheet.

Tracking Payments in Xero: Within Xero, you have multiple options for tracking payments. Here are a few methods to consider:

1. Accessing Invoices:

• Navigate to the “Business” dropdown menu and select “Invoices.”
• Locate the invoice within the “Awaiting Payment” section.
• Once the payment is received, the invoice will move to the “Paid” section, confirming that it is no longer awaiting payment.

2. Utilizing the Contacts Feature:

• Click on the “Contacts” dropdown menu and select “Customers.”
• Locate the customer’s profile, such as Jones Guitars or Smith Guitars.
• Inside the customer’s profile, you can access detailed information about their invoices, including their payment status (approved or paid).

Managing the Clearing Account: While the clearing account may seem redundant in our example, it remains an essential feature for handling various payment scenarios. The clearing account acts as a temporary holding account, allowing you to track payments before transferring them to the appropriate accounts.

Batch Deposits and Clearing Account: In situations where multiple payments or invoices need to be deposited together, Xero offers a batch deposit feature. By selecting the invoices you wish to deposit as one lump sum, you can streamline the deposit process and ensure accurate record-keeping. This method is especially useful when payments are expected to hit the bank account as one combined transaction.

Correcting Errors and Revising Deposits: Occasionally, mistakes may occur during the deposit process. If you need to correct an erroneous transaction, you can easily undo or delete the transaction from Xero. By drilling down into the source transaction and utilizing the appropriate options, you can remove the erroneous deposit and make the necessary adjustments.

Making Accurate Payment Deposits: To ensure accurate payment deposits, follow these steps:

1. Depositing Payments:

• Access the relevant payment in Xero and click on the “Deposit” button.
• Specify the deposit date, reference, and bank account where the funds will be deposited.
• Allocate the payment to the appropriate accounts, such as increasing the checking account and decreasing the accounts receivable balance.
• If necessary, use the clearing account to temporarily hold the payment before transferring it to the desired accounts.

Recreating the Balance Sheet: If you encounter any discrepancies or errors in your balance sheet, you can recreate it in Xero. Follow these steps:

1. Accessing the Balance Sheet:

• Click on the “Accounting” dropdown menu and select “Reports.”
• In the search bar, type “Balance Sheet” or locate it under your favorite reports.
• Adjust the date range to include the relevant period, such as 2023.
• Update the report to display the updated figures.

Verifying Numbers with Trial Balance: A trial balance can help you verify your numbers and identify any errors. Here’s how to generate a trial balance in Xero:

1. Accessing the Trial Balance:

• Click on the “Reports” dropdown menu and search for “Trial Balance.”
• Select “Trial Balance” from the options.
• Customize the date range to match your requirements, such as the year 2023.
• Update the report to view the trial balance.

Correcting Errors in Source Documents: In case you encounter errors, especially date-related issues, follow these steps to make the necessary adjustments:

1. Identifying the Error:

• Analyze the changes in the clearing account balance and accounts receivable balance.
• If any numbers have changed unexpectedly, expand the date range in the report to pinpoint the affected transactions.

2. Drilling Down to Source Documents:

• Locate the transaction in question within the report.
• Drill down into the source document associated with the transaction, such as an invoice or payment receipt.

3. Making Adjustments:

• Review the details of the source document and identify the error, typically related to incorrect dates.
• Make the required adjustments in the source document, such as modifying the payment date or correcting any other relevant information.

Conclusion: Congratulations on mastering payment deposits and error correction in Xero accounting software in 2023. We explored the process of making accurate payment deposits and demonstrated how to recreate the balance sheet and generate a trial balance for verification purposes. Additionally, we highlighted the importance of drilling down to source documents to rectify errors and make necessary adjustments. By following these steps, you can ensure precise financial records and maintain the integrity of your accounting processes. Stay tuned for more Xero tips and tricks on our accounting journey!

Disclaimer: The examples and instructions provided in this blog are for educational purposes only. Always consult with a professional accountant or bookkeeper for specific advice tailored to your business’s unique needs and circumstances.