What are the most common Xero mistakes made by business owners doing their own accounts? In this blog article I’m not only going to take you through the most common mistakes I’ve seen as a Xero trainer, but I’m also going to show you how to avoid them.
Here’s what many entrepreneurs who are new to Xero either say or think:
“It’s so user friendly!”
“All you need to do is grab your free trial and go!!”
“What can go wrong?”
But unfortunately, if you dive into Xero without any advice, support or training things can go badly wrong. I’ve being doing Xero Health Checks since 2012 so I’m all too familiar with the mistakes that are made when people grab their free trial and go.
If you want to grab your free trial and go, make sure you get your business set up properly before you start entering any transaction in Xero. For UK sole traders and partnerships, I’ve got a Udemy course to help you out.
Then, to ensure you stay on the straight and narrow, pay attention to the 7 most common Xero mistakes I have came across, and take note of my tips on how to avoid them.
Mistake #1: Not entering Purchase Invoices
When you make a payment to a supplier it will appear on your bank reconciliation in Xero. Here’s an example below of a payment to XYZ.
Let’s assume that you have a purchase invoice (Xero calls it a Bill) from XYZ and it’s for staff training. It’s not a good idea to enter a ‘Create’ transaction on the right and code it to staff training. This is what we call cash accounting, i.e. only recording your costs as you pay for them, and is only suitable for really small businesses. What you should be doing instead is recording your costs in Xero based on the date of the invoice, not the date that you paid your supplier.
Xero Tip #1
The purchase invoice from XYZ should be entered in Xero and coded to staff training .
And then the payment to XYZ can be matched to the purchase invoice.
For some small businesses (sole trader, not limited company) you can report on a cash basis, which means that it’s okay to record your transactions from the bank reconciliation, but I still don’t recommend it. It’s good practise, to start as you mean to go on and enter all your Purchase Invoices in Xero.
If you’re unsure what a Purchase Invoice is, you may want to check out this blog post I wrote previously.
If you’re unsure how to enter your Purchase Invoices in Xero, here’s a video showing you how.
Mistake #2: Entering every cost as a Purchase Invoice
This is the exact opposite to 1) where some Xero users mistakenly think that they have to enter every single cost in their business as a Purchase Invoice.
When you make a payment to HMRC for monthly PAYE, that’s not a Purchase Invoice (Bill), it’s a Bank Payment.
If you have a receipt from Tesco for stationery, that’s not a Purchase Invoice, it’s a receipt and it’s okay to enter it as a Bank Payment.
Xero Tip #2
Here’s how to enter a Bank Payment from the Bank Reconciliation screen:
- Use the ‘Create’ tab
- Who – enter the Contact you made the payment to
- What – enter the correct account code
- Why – enter a further description if needed
- VAT – amend as required
- Add details – click to open an extended screen if you need to add further details or want to attached backup
- When complete, click on OK
And there’s some examples in my video here.
Mistake #3: Not checking regularly that your bank statement balance in Xero agrees to your actual bank balance
Things can go wrong and do, especially if your bank feed is through Yodlee rather than a direct bank feed.
For each bank account in Xero, you will see a ‘Balance in Xero’ figure and a ‘Statement balance’ figure. It is extremely important to check that this ‘Statement balance’ figure in Xero agrees to your bank statement balance.
Xero Tip #3
Check regularly (at least once a month) that your bank statement balance in Xero agrees to your actual bank statement balance. The easiest way to check is by logging on to your online bank account. By checking regularly, if things do go wrong it’s much easier to find the problem and fix it.
Mistake #4: Not understanding VAT
You need to know the VAT scheme you are on and the implications of being on that scheme. You also need to make sure that you only reclaim VAT when you can.
Xero Tip #4
If you are in doubt, ask your accountant for advice.
And being aware of the following will help:
- There’s no VAT on flights, taxis or bank charges.
- You may have a supplier who is not VAT registered. So even though there is normally VAT on window cleaning, if your window cleaner is not VAT registered, you need to make sure that you don’t incorrectly claim back VAT on his charges.
- You can’t claim back VAT on the cost of entertaining your clients.
Mistake #5: Entering your payroll payments incorrectly
If your business has employees and you operate a payroll your payroll costs need to be entered into your Xero account. This will be done automatically if you use Xero payroll. If you use other payroll software, these costs will need to be entered manually. It’s not crucial that they are entered regularly (although advisable), in-fact your accountant may enter these for you when doing your year end accounts.
But what is important is that you correctly code the payments made relating to your payroll. What you pay your employees each month is not the same as your payroll costs and these payments should not be coded to “320 – Direct Wages” or “477 – Salaries”
Xero Tip #5
Here’s where you should code these transactions:
- The monthly payments made to your employees should be entered as bank payments and coded to “814 – Wages Payable*”
- Payments to HMRC for PAYE/NIC should be coded to “825/6 – PAYE/NIC Payable*”
- Payments to Pension should be coded to “858 – Pensions Payable*”
*These are the standard Xero codes, and it is possible that your Chart of Accounts in Xero might be different.
Mistake #6: Using Fixed Assets codes in error
Fixed Assets are items purchased for your business which will be used for more than one year. There are special Fixed Asset codes in Xero, and may include the following:
- 710 – Office Equipment
- 720 – Computer Equipment
- 740 – Buildings
- 760 – Motor Vehicles
- 764 – Plant and Machinery
So firstly you must make sure that you don’t use these codes for items that are not Fixed Assets e.g a stapler (costing £10) should not be coded to Office Equipment. Instead, it should be coded to Stationery or Office Supplies
And secondly, you need to make sure that all your Fixed Asset purchases are posted to these codes.
Xero Tip #6
If you rename your Fixed Asset Codes in Xero it makes it easier to use them correctly. I would suggest renaming them as follows:
- 710 – Office Equipment (> £200)
- 720 – Computer Equipment (> £200)
- 764 – Plant and Machinery (> £200)
If you’re unsure how to rename your accounts codes, check out my 2 minute video.
Mistake #7: Inconsistent Coding
If you code things wrong, at least do it consistently!
It’s not unusual when I’m doing a Xero Health Check for a client to find a similar invoice from the same supplier each month, coded differently.
An example might be Xero training being coded to Accountancy, then Training, then Consultancy.
Xero Tip #7
To avoid inconsistent coding, I would suggest a few things you can do:
- Setup up default codes for your suppliers. This will save you time on data entry as well as cut down on coding errors. In this video I explain how to set up your Supplier defaults.
- Rename your account codes, or add descriptions/explanations so that it’s clear to users when particular codes should be used.
How to avoid these “7 deadly sins” of Xero?
The reason I know about these 7 common Xero mistakes is because I’ve been reviewing Xero accounts for clients since 2012.
After reading this, hopefully if you have done things wrong, you can go ahead and start fixing them.
I’ve created a handy checklist to remind you how to avoid these “7 deadly sins” of Xero. Click here to receive a download to keep you on the straight and narrow.
Xero Bonus Tip – Find and Recode
The ‘Xero Find and Recode’ is a brilliant way to make corrections in bulk. Here’s a video showing you how. So even if you are guilty of making these common Xero mistakes, fixing them could be easier than you think.
If after reading all of this you are still unsure you have got your entries right and would like your account reviewed, I can do a ‘Xero Health Check’ which you can check out here.
Do you think I have missed any common Xero mistakes?
Do you have any tips to add to my list?
I would love to hear from you in the comments below.