Welcome to our guide on setting up projects in Xero accounting software for the year 2023. In this tutorial, we will walk you through the process of getting started with projects in Xero, enabling you to become an accountant hero. By effectively utilizing the projects feature, you can streamline your project management and enhance your financial reporting capabilities. Let’s dive in!
- Getting Started
To begin, let’s navigate to the custom Xero homepage and access the new company file. Ensure that you have duplicated the necessary tabs, such as the financial statements, for easy access throughout the setup process.
- Configuring Financial Statements
Within the middle tab, go to the “Accounting” dropdown menu and select the “Balance Sheet” option. This will allow you to view the current financial position of your company. Next, navigate to the right tab and repeat the process to access the “Income Statement” and review your company’s revenue and expenses. Customize the date range to reflect the entirety of 2023, specifically until December 31st, for accurate reporting.
- Enabling the Projects Feature
If you haven’t already enabled the projects feature, follow these steps. Click on the dropdown menu and locate the “Projects” option. Within the Projects screen, you will find a prompt to activate the projects module. Click on it to turn on projects for your company. Once enabled, the projects tab will appear on the right-hand side of the screen.
- Understanding the Significance of Projects
Before we delve into setting up projects in Xero, let’s take a moment to explore the role of projects within accounting software. Traditionally, projects are utilized in specialized areas, particularly in job cost systems. With Xero’s projects feature, you can efficiently manage project-related financials, track costs, and monitor progress.
- The Accounting Flowchart
To better understand the integration of projects within accounting systems, let’s refer to the QuickBooks Desktop flowchart. The revenue cycle, represented in the customer cycle, plays a crucial role in project accounting. Depending on your industry, the revenue cycle may vary, accounting for both cash-based and accrual-based systems. Understanding the revenue cycle is essential for accurate financial reporting.
- Project-Based Systems
In project-based systems, such as those used in construction projects spanning multiple years, revenue recognition becomes more complex. By incorporating projects into Xero, you can effectively manage revenue recognition, invoice clients, track payments, and handle project-specific financial transactions.
Revenue Recognition in Project-Based Systems:
In project-based systems, revenue recognition becomes crucial, especially for long-term projects where cash collection may occur before the project’s completion. Traditionally, revenue is recognized when the work is completed, and an invoice is generated for the client. Alternatively, if payment is received at the same time as the work, revenue is recorded when the “Receive Money” form is created. However, for longer projects, determining when to recognize revenue can be more complex.
Different Revenue Recognition Principles:
When dealing with long-term projects, there are two main revenue recognition principles to consider: completed contract and percentage of completion. The completed contract method recognizes revenue only when the project is fully completed. On the other hand, the percentage of completion method recognizes revenue based on the progress made on the project. Xero allows you to choose the appropriate method based on your project’s nature and industry requirements.
Tracking Projects and Jobs in Xero:
Within Xero, projects are primarily tied to specific customers or clients. This allows you to effectively track the progress and financials of individual jobs within a project. It is important to note that projects in Xero act as an enhanced version of the previous job or sub-customer functionality. While projects provide advanced tracking capabilities, if you need to categorize transactions or break down the income statement further, you can explore additional tools like class tracking.
Exploring Xero’s Projects Functionality:
When accessing the projects tab in Xero, you will find various features to assist you in managing projects efficiently. These include time entry for tracking staff hours, staff permissions for controlling access to project data, and staff costs for calculating project-related expenses. Xero’s projects module provides a comprehensive workspace for handling all aspects of your projects, allowing you to monitor progress, track costs, and analyze profitability.
Specializing in Job Cost Systems:
If you are a bookkeeper or accounting professional, specializing in job cost systems can offer unique opportunities. By developing expertise in managing project-based financials, you can cater to clients who require job cost tracking. This specialization can be particularly valuable for industries such as construction, professional services (law firms, CPA firms, bookkeeping firms), and other sectors where job-based revenue recognition and project tracking are essential.
Project Categories and Lifecycle:
When dealing with projects and longer-term jobs, it is helpful to categorize them into stages such as drafts, in progress, and closed. These categories represent the different phases of a project, starting from the initial draft phase, moving into the active project phase, and finally marking it as closed upon completion. These stages align with the concept of class tracking in Xero, allowing you to efficiently organize and manage your projects.
Exploring Xero’s Projects Module:
Within the projects module in Xero, you will find a range of useful features to streamline project management. Let’s take a closer look at some of these features:
- Drafts, In Progress, and Closed: These project categories provide a clear overview of the status of each project. Drafts represent projects that are yet to be approved, in progress indicates active projects, and closed signifies completed projects.
- Timer: The timer feature allows you to track the time spent on a specific project. This can be useful for capturing billable hours accurately and monitoring project progress.
- Reports: Xero offers a variety of project-specific reports to help you analyze project performance. These reports include project detail, project time, and profitability reports, allowing you to gain valuable insights into project costs and revenue.
Creating and Managing Projects:
To create a new project in Xero, follow these steps:
- Navigate to the Projects tab in Xero.
- Click on the “New” button and choose either “New Draft” or “New In Progress” based on the project’s status.
- Enter the customer or client name in the contact field. This associates the project with a specific customer.
- Assign a project number or name to identify the project.
- Set the project deadline, if applicable.
- You can estimate project costs and expenses by using the “Estimate” feature in Xero.
- Choose the project’s visibility settings, determining who can access and view the project details.
Assigning Transactions to Projects:
As you work on a project and generate transactions such as invoices or expenses, you can assign them to the relevant project within Xero. This allows you to track income and expenses associated with specific projects accurately. When creating an invoice or expense form, simply select the project number or name from the “Assign to Project” dropdown menu.
Tracking Project Profitability:
Xero’s projects module provides a dedicated profitability section that functions similarly to an income statement for a particular project. By subtracting costs from the invoice amount, you can monitor the project’s profitability and evaluate its financial performance.
Generating Project Reports:
Xero offers a range of project reports that allow you to analyze and review project-specific information. Follow these steps to generate project reports:
- Right-click on the tab to the right and select “Duplicate” to open a new tab.
- Within the new tab, navigate to the Reports section in Xero.
- Explore the available project reports, such as project detail, detailed project time and expense, project summary, project financials, and more.
- These reports provide a comprehensive overview of the information assigned to each specific project, allowing you to assess project progress, expenses, and profitability.
Generating All Projects Report:
In addition to project-specific reports, Xero also allows you to generate a consolidated report that includes all projects. This report provides a comprehensive view of all projects in one place. To generate the All Projects report, follow these steps:
- Return to the Projects module by navigating back to the Projects tab.
- Click on the “All Projects” option to view a list of all projects in Xero.
- Access the reports section and select the desired report, such as project detail or project summary.
- By generating an All Projects report, you can gain insights into the collective performance of all your projects, allowing for better analysis and decision-making.
Adding Additional Projects:
To add new projects in Xero, simply follow these steps:
- Go to the desired project category, such as “In Progress.”
- Click on the “New” button and choose “New In Progress” to create a new project.
- Select the customer or client associated with the project. It is essential to tie each project to a specific customer for accurate tracking.
- Assign a unique project number or name to identify the project easily.
- Save the project, and it will be added to the designated project category.
Enhancing Specialized Skills:
It’s important to note that project management and job cost systems are specialized areas within accounting. As a bookkeeper, you can consider specializing in these areas to differentiate yourself in the market. Job cost systems, including project-based accounting, often involve complexities such as inventory tracking and long-term project management. Developing expertise in these areas can make you a valuable resource for businesses requiring more advanced accounting solutions.
Congratulations! You have now learned how to generate project reports, including project-specific reports and consolidated reports for all projects in Xero. Additionally, you have gained insights into adding new projects and enhancing your skills in specialized areas like project management and job cost systems. By effectively utilizing these features in Xero accounting software, you can streamline project workflows, analyze project performance, and provide valuable insights to your clients. Stay tuned for our next blog, where we will explore additional aspects of project tracking and accounting in Xero. Happy accounting!