Xero In on Xero; Tax Preparation

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Xero helps tax preparers save up to 2 hours per client on write up work.

In the US, tax preparation is why most small businesses keep accounting records. They need adequate records to not only prepare their tax return but to have evidence in case they are audited by the IRS. Many clients, especially small businesses, rely on their CPA or tax preparer to compile their entire years’ worth of data by traditionally dropping off in a box bank statements, credit card statements, and receipts and the accountant would manually add up all the transactions and prepare the return. This process could take weeks and a lot of time and effort. This process is traditionally called “write-up,” because you were writing up the client’s books for the entire year.

With Xero, a lot of this can be automated. Instead of your client dropping off a box of bank statements, you can request your client send you a CSV file of all the transactions for the year. Better yet, they could give you read only access to the bank accountants and credit cards so that you can have access online without having to wait for the client.

Xero Pro Tip: You can set up a Partner Edition Xero Ledger ($3/month) or Xero Cashbook ($7/month) edition and import all of the transactions for the year in a matter of seconds. Setting up a Xero account for tax purposes is a little different from normal accounting, so let’s walk through it.

Once you have the client’s bank account data or logins, you can add a bank account and get started. You can do this by clicking on Accounting and then Bank Accounts.

Once in the bank account section, there will be an “add bank account” option. You can add as many bank accounts and credit cards here as the client has.

Before importing the transactions, you need to import the beginning trial balance for the year. To do this, go to Accounting > Advanced > Conversion Balances. You also might want to update the chart of accounts to match your previous system, or you can use the default in Xero.

The beginning balance of the bank account MUST match the actual bank statement balance. This might not match the tax return as there might have been outstanding checks or deposits which had not cleared the bank at year end. If this is the case, you need to enter those checks manually to rounding.

For instance, if the bank account balance per the bank statement was $10,000 at the end of last year, but the balance on the tax return was $9,000 because of an outstanding check of $1,000 to your CPA. In Xero, you put the beginning balance as $10,000 for the bank and $1,000 to rounding. Then you go manually put in that check for $1,000 on 1/1 and code it to rounding. Here is what it will look like in my example. I normally code the balance sheet and put all the income and expenses to retained earnings instead of messing with breaking them out, but if you want comparative balances between years you should code the entire trial balance.

Once you have the beginning balance right, make sure you lock the balance by checking the box at the bottom left of the screen before hitting save.

Now that we have the balances in, let’s import the bank transactions for the year. Note: If you have the bank login, you can just hook up the bank feed and import the transactions. You can set the date to start the transaction import. The available time period is determined by the availability of the data from the bank.

If you need to import transactions, go to your dashboard and click the three dots next the bank you want to import the transactions for. You will see Import a Statement as an option; select this.

After, you will see a browse button to select a file. The best type of file to upload is an OFX file, so if your bank gives you that option, use that. If you don’t have that option and all you have is a CSV file, you need to import the CSV in the proper format. To do that, download the CSV template on the right side of the screen.

Once you have it formatted, select Browse and then Import. To make sure everything has imported correctly, go back to the dashboard and look at the statement balance of the bank account. That statement balance should match what is in the bank as of whatever day you imported. For instance, if the Statement Balance says that it was $15,000 on December 31st, then that should be the bank statement balance as of December 31st. If it’s not, then a transaction didn’t get imported properly. You will need to find the transaction or transactions that did not get imported correctly. The easy way to do this is to look at the Bank Reconciliation Report and compare to the bank statements.

Now that you have your bank transactions into Xero, it’s time to code the transactions. To do this, go back to the dashboard and hit reconcile. Here you can go line item by line item and code, or you can do it more efficiently and use cash coding or bank rules to quickly code all of the transactions for the year.

Once you have coded all of the transactions, you can check the reports to make sure everything is correct. You can also add journal entries for depreciation or other adjusting entries at this time. Once you have the trial balance right, it is time to export to your trial balance or tax program to import into the tax return.

To do this, go to Accounting, Advanced, and then Export Accounting Data. You will then be able to select your program, the ending date of the trial balance, and whether you want it exported in cash or accrual basis.

There you have it. You have just coded all of your transactions for the year quickly and easily in Xero. For our firm, this has saved us about two hours on average per traditional write-up client. And once you have done all the setup work in the initial year, the second year takes about half the time as you already have the balances and accounts set up.

Author Bio: Jason L. Ackerman, CPA, CFP®,CGMA is from Fort Mill, SC and went to NYU with a Bachelor of Science in Accounting and Minor in Art History. He started with BNA in 2012 and is a member of the AICPASC Association of CPAs. His hobbies include basketball, golf, and playing piano.