Xero For Dummies. Heather Smith

reports is to help managers and business owners manage the business. Use language and terminology you understand. Override technical accounting speak and replace it with lingo that helps internal staff quickly understand and digest information. If you don’t like the term accounts receivable, for example, change it to dudes who owe us money. I promise the accounting secret police won’t come knocking at your door.

If business reports are required for outside bodies, you can extract the reports from Xero and easily reword any of the more individual terms you’ve used to suit the required accounting lingo. You, and any of your internal staff, being able to quickly view reports and understand what they mean on a day-to-day basis is more important for your business success.

      Less is more

      If, somewhere during the process, account lines have been generated that you are unlikely to use in the next couple of years, remove them. Adding new accounts is quick and easy — so, for example, don’t hang on to the Building Premises account line in the hope that one day you may own your building. Live for today and develop a streamlined chart of accounts that suits your business now. Ask yourself whether the way you’ve split income or expense streams is really useful. Will this help you make efficient and effective decisions in your business?

      Developing your own chart of accounts

      When it comes to developing a chart of accounts, I like to start with a blank canvas, work out the essentials, and allow the chart to organically grow with the business. Adding new accounts as you’re developing the business is easy — so don’t feel compelled to do it all now!

      

Speak with your accountant and ask if she has a preferred chart of accounts. I encourage all my clients to speak with their own tax accountant before developing a customised chart of accounts with them.

      In this section, I share a few simple methods I use when I work with customers on developing a useful chart of accounts. Note: If your business is relatively straightforward, the insight you need about different income streams and the direct costs associated with these may be generated by simply using Xero’s Tracking features. (See Chapter 12 for more on Tracking in Xero.)

      Looking at income and direct costs

      Say I had a customer who needed to define a suitable chart of accounts for her catering business. I ask to look at her business card and work out the business involves the following services (in order of income generated):

       Full-service caterer

       Dinnerware and linens

       Chef and wait staff

       DJ

Of course, if she didn’t have a business card, I could ask to look at her website or other advertising material, but typically the back of a business card sums up the business — and, if it doesn’t, the conversation probably becomes about designing business cards to promote what the business does! Back on track, in this example the caterer clearly has four main streams of sales income, each with associated direct costs. These four income streams, and the direct costs associated with each stream, need to be reflected in the account types created within Xero (and so also reflected on Xero’s Chart of Accounts).

      If, for example, the caterer wanted to understand the gross profit generated by offering the services of a DJ, in her chart of accounts she would allocate an account showing DJ sale income to account type Sale, and an account showing DJ direct cost to account type Direct Cost. To identify the gross profit, she can then deduct the direct cost of employing the DJ from the sales income generated through hiring the DJ.

      Setting up a meaningful chart of accounts and ensuring data is allocated correctly means useful reports can be produced and analysed. Take the time to understand what your business does, and how allocating account types can affect your reports and enhance business decisions.

      Understanding other expenses

      Along with direct costs (refer to preceding section), three other expense account types are possible: Expense, Depreciation and Overhead. These represent the overall operating expenses for the business, and I like to break them up over four groups:

       Promotion: This relates to any advertising, marketing or promotional spend incurred by the business and is allocated to account type Expense. A catering business, for example, may include Facebook advertising and website design here.

       People: This relates to staff expenditure, including wages, amenities and training advertising. Expenditure for full-time staff could be allocated to Overhead, while expenditure on casual staff is allocated to account type Expense. Continuing to use the catering business example, people expenses for this type of business may include wages, workers’ insurance and kitchen amenities.

       Place: This relates to all expenses associated with the location the business occupies and is allocated to account type Overhead. A catering business may include rent, electricity and rates here.

       Provisions: This relates to all the general expenses of the business and may be allocated to account type Expense, Depreciation or Overhead. For example, a catering business may include telephone expenses, petrol expenses, depreciation and subscriptions here.

      

Do not create promotion, people, place and provisions as account types. How these terms can be used is covered in Chapter 9, which discusses customising report templates.

      Refer to the section ‘Working out how account types affect your reports’, earlier in this chapter, for details of what to include in the Equity, Assets and Liabilities section of your Chart of Accounts within Xero. See Chapter 9 for more on reporting outcomes.

Setting Up Your Chart of Accounts

      In the following sections I take you through the two main ways of setting up your Chart of Accounts in Xero — using Xero’s default set-up, or customising it to meet your needs.

      

If in any doubt during this foundational step of setting up your Chart of Accounts, speak with some experts. A management accountant can help you ascertain what useful information can be generated from your business accounts, which in turn can assist in making business decisions. However, you should also speak with your tax accountant as she may have a default chart of accounts she prefers you to use. The fees you pay to your tax accountant may be significantly reduced if you use her suggested chart of accounts, because your accountant will undertake less work during the annual tax preparation process.

      Using Xero’s default Chart of Accounts

      The Xero organisation includes a default Chart of Accounts, which is perfectly suitable for simple straightforward businesses. If you choose not to use the default Chart of Accounts provided by Xero, you can import your own chart of accounts. Detailed information about converting from another accounting software system, including dealing with discrepancies, can be found in Chapter 3. Each of the options still allows you to edit the