Xero is undoubtedly one of the most used accounting software out there. It streamlines all your financial data and helps you generate useful reports and maintain a chart of accounts in Xero. This helps in keeping the financial information easy to organise and understand. The chart helps in maintaining a long list of accounts in groups so that it is digestible for the employees and third parties as well. However, using Xero might get a little confusing for new users, especially those that have never used online accounting software.
Investments Working Group has the sole purpose of helping people understand how their investments are performing. No investment, especially one that has large amounts of financial data, can be successful if that data is not managed properly. Xero is one of the many tools available that can help you achieve the goal of data management of your financial records. We hope this article helps you better understand how reports work in Xero and how you can use its many features to your advantage.
Let’s take a look
What is the Chart Of Accounts in Xero?
There are different financial tools available in the Xero Accounting Software. One of them is the Chart of Accounts (COA), also known as the backbone of all financial activities. The reason is that it keeps the record of all the transactions taking place through a certain name and account number. COA is a comprehensive list of the financial accounts that live in your software because of the transaction that occurred from either side within a specific time period. Each row shows the information of a separate account in the record.
Since not all of us are finance experts but most of us are running a business these days so it is important to understand some basic financial principles. Xero Accounting Software has made that easy by its easy-to-understand system, allowing us to keep a clear track record of all the required information such as cash flows, balance sheet, profit and loss etc. All you have t do is sign up and make your account at Xero and start putting all the financial information related to your business on this tool. Once you are on the main page, you will see different tabs on the top. These tabs include; Dashboard, Business, Accounting and Contacts. Select the accounting tab for a drop-down menu to see all the available options and one of them will be Chart Of Accounts.
Why is Chart Of Accounts in Xero is important for business?
Before getting into how this tool works, let’s understand why it’s so important and what difference does it make in your business. Your COA brings the business information together in one place in a precise, digestible manner so that it’s easy to understand. It basically tells you where your money is going and why. The tools make it easier to monitor your cash inflows and outflows and that the profit gets maximised. Also, it alerts you when you have to make a payment or receive something from an account.
If you are a small-medium enterprise, the chart of accounts in Xero will be much more simple and easy to understand. Now you need to note that how the information is being inserted is very important. If you add a transaction at the wrong place, for instance, you’ll get inaccurate reports. Which is much more common for bigger companies. In such a case, you need to manage two reports; Bank statement and income statement.
Balance Sheet Statement
The balance sheet is another very commonly used financial tool that includes all your assets and liabilities. Both sides must be equal for the accurate recordings otherwise there is an error in your entries. When there is any mistake in the COA, you can consult your balance sheet. For this, you need to make sure that everything is added where it should be. The correct balance sheet will help you attract investors and will prepare the taxes accurately to match the income tax return.
Income Statement
If the COA is not accurate, you can take help from your profit & loss or in other words income statement. An income statement is all about your total income and total expenses. The difference between both is either your profit or loss. Thus, the tool tells the financial health of your business and can be used to keep a track of how much profit or loss is being generated.
Guide to set-up Chart Of Accounts in Xero Accounting Software
The chart of accounts provided by Xero is very simple and to the point. After logging into your account, go to the accounting tab present on top of the screen. There will be a drop-down menu from where you can find the chart of accounts in the advance section. The software keeps updating itself so there might be small changes with time.
After selecting the Chart of Accounts, a screen will appear on your gadgets that would look like this. At the top, you can see five further tabs which include; assets, liabilities, equity, expenses, revenue, archive and then you can also opt for all accounts which will include all five categories.
Add a new account
Once you have reached the screen pasted above, you can add a new account to the list. Let’s see how it’s done. Right below the ‘Chart of Accounts’ title you can see a bar with a plus sign saying add account. Click on the tab and another small screen will appear
Here you can see few bars of information that are required. First up is the account type, by clicking on the arrow you will get different subcategories to choose from assets, liabilities, equity, expenses and revenue. For instance, if you want to add your transaction for electricity bill then add that into your expenses. You can give a unique code, name and description to each entry for easy understanding. After selecting few more options, save this and it will appear on your chart of accounts.
You can also do some changes to your entries. There is an option to delete and archive your accounts. If you click on any account, the same screen will open again where you added the account type and code number etc. Here, you can update or change anything if you like and then click on the save button to save all the changes made.
Components Of Chart Of Accounts
Xero is software that helps in maintaining the records of a growing business as it gets difficult to organise a bulk of information in a digestible manner. As far as the chart of accounts is concerned, it is one of the great tools present in this software that will help you organise your bank accounts under 5 categories that are assets, liabilities, equity, expenses and revenue. You can group relevant or same category information together with the help of this tool. Which then makes it easier to look at and understand without any hassle.
Whenever you add an account to this chart, there will be five components. Now, let’s take a look at all the components on the Chart of Accounts in Xero accounting software one by one.
Code
With each entry, there is a unique code associated that is written on the left corner of each row. A code can be of 10 characters. This helps in grouping related accounts together which again helps in organising all the financial records in a fine manner. You can search the required account with the help of this code from a long list of accounts.
Name & Description
Just like the code, each account has to have a unique name and a small description in Xero. Every account must have a name as it is mandatory and should not be more than 150 characters. However, the description is optional. Letters, symbols and numbers can be used to write your description which should not be more than 1000 characters. Both of the information is editable. They help you remember what the account was about and why it is present on your chart. After you add the name and description, you will see the top line shows the name and the description is written below in the name section.
Type
Each account has to be categorised into a type of account. There are five types of accounts and they have further categories. Let’s see what these are;
Assets
- Current assets
- Fixed assets
- Non-current assets
- Repayment assets
Liabilities
- Current liability
- Non-current liability
Equity
- Retained earnings
- Reserves
Expenses
- Depreciation
- Direct costs
- Overheads
- Expense
Revenue
- Income
- Sales
Tax Rate
There is a column of tax rate which is applied on each account allowing Xero to determine how the account has been added for GST purposes. There are few options of the tax rate that are available in the software as default. The tax rate can be added while adding the new account in the chart and it can be edited later as well.
Year To Date
Just like all the components mentioned above, each account will also have a year to date that shows the balance as calculated from the start of the financial year. This financial year was set at the start of creating a chart of accounts in Xero. YTD will be shown on the following types of accounts;
- Revenue and Expense accounts
Here YTD shows the sum of all the transactions that took place in the financial year belonging to one account. If you click on this, you will get a list of all the transactions done on this particular account
2. Asset, liability and equity accounts
This balance gets updated on the current date. When you click on YTD here, you will get the transactions counted in the balance.
Other Useful Functions
Xero offers a few more functionalities that are very useful so let’s take a look.
File Import and Export
Xero Accounting Software allows you to perform few more functions which are really important such as importing or exporting your data from other platforms. This feature allows you to maintain the original shape of the data from other platforms and put them in this software. While on the other hand, you can easily export the data available on Xero out of the software. This enables you to easily set up things again when in need such as changing office or gadgets etc.
Old Accounts Archive
If you think the account is not in use anymore, you can simply put the account into archives. By doing so you are only putting a stop to adding any more data to the existing information. Also, all the data already available is going to remain saved here.After getting to know about all the useful functionalities of a chart of accounts in Xero, you must be desperate to streamline all your financial data. This tool is really helpful when you have a pile of data unorganised and does not show the current status of your business. In such a situation choose Xero Accounting Software to save your business. At Investment Working Group, we would want you to learn to manage rates your personal finances in a better way.
