Before you start

This guide is intended both to aid those using Xero at a small charity and to assist in documenting the processes related thereto.

One aim of the guide is to allow correct record keeping as you go along, in a simple manner and minimising the journal entries that need to be made. The workflow envisaged could imply that journal entries are left for a qualified book-keeper to do but are described so that you can do them yourself if you feel confident about doing so.


It is not intended to duplicate here the Help provided by Xero itself, which should work for general users and will be more up to date as regards Xero functionality and interface. So the reader will often be referred to Xero for sections where their general advice should be sufficient or at least covers the basics adequately.

Getting started

It is probably a mistake to start with 100% reliance on the software from the beginning of a financial year and no prior experience of the software. A “soft landing” is preferable.

  • Start by integrating your bank account(s) and getting used to entering bills and invoices and reconciling (coding) bank transactions.
  • Then incorporate the Payroll module and take a few months to make sure that you are using that correctly and – for example – that the amounts of tax and national insurance paid are correct.
  • Finally start adding historic assets and liabilities to the balance sheet in preparation for deriving an accurate year-end balance sheet. You may need some accounting help with this.


After the end of the financial year, prepare accounts in the normal way (i.e. not exclusively reliant upon Xero – after all you will only have a part-year in Xero). Then have your accountant (or examiner/auditor) make adjustments in Xero – in particular via entry of “Conversion balances” in order that the turn of the year balance sheet in Xero matches that produced for the year.


From then on, you should be able to rely on Xero for all your financial reporting, as well as for payroll processing. This guide assumes you get help (if you need it) in setting up a clean balance sheet for the first full year of Xero use. It is principally aimed at helping you in running the system from thereon.

In the main, this guide makes use of preconfigured accounting codes. However in some cases the text assumes new codes have been added (for example to distinguish types of grant income from sales). The guide assumes that your accountant has already added any extra codes you want. If you wish to do this yourself, the Xero help is at:

https://central.xero.com/s/article/Add-or-edit-an-account-in-your-chart-of-accounts

I should add that the guide was developed for a small charity whose dominant source of funds are grants from government or charitable foundations and whose main expenditure is on paid staff and running an office. Hence so far I have not covered in particular:

  • Sales, cost of sales, and related inventory/products
  • VAT

These are standard business issues and I would hope that general Xero help covers them adequately.

A good portion of the guide relates to tracking project or donor funding use. It uses both of the two Xero tracking categories for this, called respectively “Funding type” and “Donor/project tracking”. Before you start any project tracking read the related set up section and get the codes values you will need set up by using the guidance on that.

Payroll

As you may infer from the earlier reasoning, it is recommended that you subscribe to the Payroll module if you have any salaried staff. You can provide access to the system to the person who currently does your payroll or you can train a current admin employee in the system.


The online training and help provided by Xero is probably sufficient but Xero is widely enough used that you can probably find live courses or face to face training not far away.

Accounting concepts

For those not familiar with accounting there are some key accounting concepts to be aware of:

Accrual events and dates

These are the events and related dates relevant to a “true” view of income and expenditure for a period. They can differ from when money is paid out or received (cash flow events). An example would be if you issue an invoice on 15 March 2019 which is not paid until 14 April 2019 (in the next financial year). The income associated with the invoice accrues on 15 March 2019 (and hence in FY 2018_19) even though the money has not been received. (In some cases – but ignored here – accounts may be prepared on a “cash basis”, which means that only the cash flow events are considered.)

Assets and Liabilities

At a given point in time the organisation owns certain things of value (assets) and may also owe others (either definitely or potentially) certain sums of money (liabilities). They are generally split into long term and short term items; long term being Fixed Assets (like equipment) and Long term liabilities (like loans for more than 1 year); short term being Current Assets and Current Liabilities. An example of a current asset would be the amount owed to the organisation on invoices issued before the date in question but not yet paid.

Journal entries

These are accounting actions which change the presentation of data without any “real world” transaction having taken place, like a payment made or bill received. They can only be made by someone with Advisor permissions, typically someone with some familiarity with accounting. Consequently, any process herein that implies use of journal entries might be one you would delegate to your accountant if you are not confident about it. Nevertheless it is important to realise what journal entries do and hence when they might be needed. A couple of examples to illustrate:

  • Retrospectively code £200 of wage cost to Project A. The journal entry creates a wage cost of £200 for Project A (on a certain date) and at the same time reduces the total unallocated wage cost by £200.
  • £5000 of a grant received in 2018/19 was intended for use in 2019/20. It was therefore originally classed as an “Income in advance” liability. (It is potentially owed back to the donor in the case that we cease to operate.) Since we are still in business in 2019/20, we can then realise it as income (i.e. accrue the income). A journal entry therefore creates donor income of £5000 and reduces the Income in advance balance by £5000 at the same time.

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