💡 Mohammad’s Tip: Timely and accurate bookkeeping will save you taxes! Remember, it’s not just about making money, it’s about taking home the most money that you can!
Timely and accurate bookkeeping is more than just good practice — it can save you money on taxes and give you the data you need to make smarter business decisions. If your Xero account hasn’t been maintained properly, a bookkeeping cleanup can help you figure out where you went wrong, and make sure that your records are accurate, reliable, and ready to go!
At Akif CPA, we use a five-step framework for Xero bookkeeping cleanup. These are based on our 🔑 5 Key Bookkeeping Checks 🔑, which are the five places in Xero that you will see errors if your books have been setup incorrectly.
What causes issues in Xero?
99% of the time, it’s an issue with…
- ✖️ Data entered into the wrong place
- ✖️ Not understanding how data feeds into each report
- ✖️ Altering or not checking automations
- ✖️ Basic accounting (not knowing you need to reconcile)
Yep, it’s usually user error, but don’t sweat it! Every software has a learning curve, and even experienced bookkeepers sometimes run into trouble. If you’re a DIY bookkeeper, your errors might just be due to bookkeeping best practices you didn’t know about. But, there’s no need to stress! Here’s where to look for red flags:
1. Review Financial Reports (Profit and Loss/Balance Sheet)
Start with the Profit & Loss (P&L) and Balance Sheet. These reports give you an overview of income, expenses, assets, and liabilities. If your data is wrong here, it means something in your base data is wrong.
- Check for unusual items, such as negative expense accounts.
- Look for differences compared to prior years.
- Verify that bank balances are positive (unless there’s a temporary overdraft). 90% of the time balances should be positive.
The goal is to spot red flags that indicate misclassified or missing transactions.
2. Check the Chart of Accounts
Your Chart of Accounts is the foundation of your books. If accounts are set up incorrectly, reports will be inaccurate.
- Make sure balance sheet accounts are not being used in the P&L.
- Verify that fixed assets, liabilities, and equity accounts are properly categorized.
- Ensure the equity setup matches your entity type (corporation, partnership, etc.).
3. Bank Reconciliation
Reconciliation makes sure your books in Xero match your actual bank and credit card accounts.
- Check the reconciliation status in Xero. If you don’t see a reconciliation date, it means you’ve never reconciled—time to get started!
- Look for unreconciled transactions — they show mismatches between your bank and Xero.
- Reconcile consistently month by month (you can’t skip around).
- If you have unreconciled transactions from previous years or months, make sure you walk through the reconciliation process from that moment all the way to the present in chronological order
Pro tip: You can’t just skip around and reconcile a month here, a few months there. All reconciliations affect all balances that come after them, so you must run through them chronologically. Fixing one error might reveal seven or eight errors down the road, or sometimes none at all!
Without reconciliation, your reports won’t be reliable.
4. Make Sure You Understand Bank Rules
Bank rules are a common but overlooked source of errors.
- Xero automatically categorizes transactions, which it does a great job of!
- But, sometimes, people go in and change a single transaction, not realizing that they’re changing the entire bank rule. So, if you change a purchase at Office Depot from Office Supplies to Packing Supplies, you might accidentally make it so all future Office Depot purchases get automatically categorized as Packing Supplies
- If a rule is changed to the wrong thing, it will keep misclassifying future transactions.
Review and clean up your bank rules and check on them once a month in order to avoid hidden errors.
5. Accounts Receivable (AR) and Accounts Payable (AP)
This step is especially important if you’re using Xero for invoicing and bill payments.
- Check for open invoices that have already been paid but not marked as closed in Xero.
- Look for vendor bills marked unpaid even though payment was made.
- Identify duplicate entries, where both the bank feed and an invoice record the same transaction.
Clean AR and AP ensures your Balance Sheet matches reality.
If you’re a user who uses Square integration or imports transactions from a bank or other platform, make sure you’re running checks to be sure all of your transactions and invoices match.
Once these areas are corrected, your books will be accurate and tax-ready. Timely cleanup doesn’t just keep your accountant happy — it saves taxes and helps your business grow.
Here, Mohammad Akif of Akif CPA walks you through these 5 steps, showing you where in the software to look and sharing observations from our own Xero bookkeeping cleanups: https://youtu.be/ubTMRst9sjs
