Understanding Xero's limitations allows you to create the best systems
1 - Entity type does not affect reports or chart of accounts
Under organisation settings, you can change the entity type:
- Company
- Partnership
- Sole Trader / Proprietorship
- Trust
- Joint Venture
- There will be others, depending on your location.
Changing entity types under Xero’s organisation settings does NOTHING for your reporting or chart of accounts.
It does not allow you to enter details such as directors names, trustees or partners names.
This is why we design the system the way we do.
2 - Account codes do NOTHING for reporting
Most accounting software uses account types and codes to determine the placement of the account.
Your clients can create any account they want, when they want, how they want and use it how they want (assuming they have user rights, which many do). Meaning you have limited or no control over the chart of accounts.
Do you really want your builder or hairdresser clients messing around with the chart of accounts?
Is there a solution?
- YES
- Xero has designed a mapping system that sits behind the chart of accounts called “Report Codes”.
- Report codes are what makes Xero work, if your clients report codes are not set up correctly, your reporting will break
You and your team will need to be fully trained, skilled and confident on report codes to understand Xero and how it works.
We would have focused a lot on this during training.
It will be possibly the biggest change for you.
Tip - create yourself an open mindset of “I need to learn a new language or I will probably fail to get maximum value”
3 - Xero does NOT roll over at period end
You are probably used to the options to hit “close accounts for the period”.
In previous accounting software, these things can / do happen:
- Owner accounts such as beneficiaries or partners close off and start next year with an opening balance. So they kind of have “groups” of accounts, such as opening, drawings and advances and closing accounts
- At period end, dividends, distributions and income tax usually close out in equity and roll over into opening retained earnings
Xero has no option to roll over at period end, meaning if you want to make historical adjustments to data, you can and it will reflect immediately.
Plus it also means that you have an issue with opening and closing balances for owners, as well as retained earnings.
You might think that this is not an issue but it is important for period end processes.
Is there a workaround?
- YES
- There are “movement” reports called “Beneficiary / Partner / Shareholder Accounts”
- You will need to do reverse journals for all distributions, dividends and income tax
- See other section for that
This area has been a major issue for many accounting firms.
I suggest that you consider accepting that some accounts will ALWAYS accumulate over the life of the business.
EG - Drawings and advances.
But keep in mind, if you run the right reports and remember that these balances are “lifetime” balances, then your life will be easier.