Small business

Three accounts marked reconciled, and none of them were

This was not a rescue job. It was a routine tune-up for an existing client, booked because superannuation rules had changed and the file was due a look. Xero showed three bank accounts, all reconciled. About two hours later it was clear that none of them were, and that the difference had been running since the previous financial year.

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ClientA business we had set up on Xero some years earlier

SizeSmall business with employees

EngagementA tune-up session. The review followed the same order of checks as the health check and diagnostic that forms part of Xero to Hero

Year2023

Led byNikoletta

The situation

Where they started

The file looked healthy. Reports ran, the bank feeds were connected, and every line was ticked. That is the part worth sitting with: the software itself reported the accounts as reconciled, so nothing in the system was raising a hand. Any tool reading that file, and that includes an assistant asked to review it, would have read the same status and agreed with it.

We work from the bank statement rather than the Xero balance. Opening the statements beside the file is a five minute check, and it is where this started. The closing balances did not match, and the financial statements had been picking up what Xero said rather than what the bank said.

Once that gap was visible, the rest followed quickly, because a bank reconciliation is not one figure among many. Everything downstream is derived from it. If your bank reconciliation is out, everything is out. Our bookkeeping service is built on the same point: a reconciled file and a correct file are not the same thing.

Diagram comparing what Xero said, three bank accounts all reconciled and every line ticked, with what the bank statements showed: the closing balances did not match, and the difference had been running since the previous financial year — Two readings of the same three accounts: what Xero reported on the left, what the bank statements showed on the right.

The challenges

What we found when we opened the file

01 Reconciled, but not reconciled Three bank accounts all showed as reconciled in Xero. Unreconciled transactions from the previous financial year were still sitting inside the current one. A tick tells you somebody clicked something.

02 GST wrong in both directions at once Unreconciled sales were overstating income and GST on sales. Duplicate and unreconciled expenses were overstating costs and GST on purchases. The two errors pushed opposite ways, which is part of why neither had ever looked obviously wrong.

03 Payroll finalised over an unreconciled ledger Single touch payroll had been finalised without the payroll accounts being reconciled first. Wages had been coded to wages expense rather than wages payable, so the profit and loss overstated wages and the employment summary report did not agree with Xero.

04 Company money in a personal account Surplus company funds were sitting in a personal savings account that was not connected to the business in Xero. In the file the transfer reads as a director drawing, and there was no Division 7A agreement behind it.

What we did

Opened the actual bank statements beside the file and compared closing balances, before looking at anything else

Traced the unreconciled transactions back to the financial year they belonged to

Ran the GST reconciliation for the lodged periods and compared it against what had been reported

Reconciled the payroll accounts and checked the employment summary report against Xero

Identified the transfers to a personal account and what they look like from the ATO's side

Set the standing rule for the file: reconcile payroll accounts before every BAS, every PAYG activity statement, and before STP finalisation

Jitka and Nikoletta of NN Accountability together in the office — Jitka and Nikoletta

The outcome

What it produced

3 Bank accounts that Xero reported as reconciled, and that the bank statements showed were not.

2 hours From opening the file to having the whole picture, in a session booked as a routine tune-up.

Prior FY How far back the unreconciled transactions ran while still sitting inside the current year.

Year 2 Where the Division 7A exposure sat. Year two is still fixable. Year three becomes serious.

The file said it was reconciled. That is exactly why nobody had looked. A green tick is a record that somebody clicked something, not evidence that the period is closed.
Nikoletta, Director, NN Accountability

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Is this you

Five things you can check in your own file

None of these needs an accountant. If any of them does not come out the way you expect, that is worth half an hour rather than a quarter of guessing.

Open the bank statement for the last day of your quarter. Does the closing balance match the Xero balance on that date?
Which figure did your last set of financial statements use, the bank's or Xero's?
Were your payroll accounts reconciled before your last STP finalisation?
Does your employment summary report agree with the wages figure in Xero?
Has money left the company into a personal account without an agreement behind it?

Who does the work

About the review

The health check and diagnostic is part of Xero to Hero, the practice's training engagement. It is a review of your actual file rather than a general explanation of how Xero works. That distinction matters here, because the problem in this file was not that anyone lacked knowledge about bank reconciliation.

Separately, and free, there is a Xero Health Check you can download and run over your own file. It is the same order of checks, done by you.

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