Client accounts

Introduction

This section concerns issues that arise if you are handling money intended for direct use by or on behalf of beneficiaries rather than for your own costs. It is possible (desirable in my view) that you have a separate bank account for such payments. Nevertheless it may be hard to avoid all such payments not coming into your main bank account (for example if a donor pays in money, part of which is for “clients” and part for your own costs).

You may need to report to donors on Client Account transactions. I assume, though, that Xero is not being used to track these, not least because of the limit (100) on the number of tracking codes you can use. (If you have a very limited number of potential beneficiaries – or classes of beneficiaries – to report on, you can just treat then as donor projects, as described elsewhere in this guide.)

This section is thus intended to provide guidance for when such transactions do, for whatever reason, go via your bank account but that you wish to filter these out of your formal accounts or at least identify them as a “Funding type” category.

Where your account is used for Client Account transactions, wherever possible one should record both pass-through transactions at the same time: e.g. payment made from Client Account to your account (a negative “Partner grant” – see below) and an identical payment made from your account to a third party (Costs incurred on behalf of Client account). This clearly does not change the amount owed by the Client Account to you (or vice versa); so no need to reconcile to that account code on this occasion. Using the income and expenditure accounts codes makes for greater transparency and has potential benefits for donor reporting (e.g. where a donor provides grants to cover both your costs and for direct financial benefits to clients).

Consequently, for the sake of simplicity and the potential reporting benefits, it is recommended always to use the relevant income and expenditure accounting codes – even if there is a delay between the incoming and outgoing payments.

So the general rule as regards accounting codes is:
• 265 “Income for Client account” used for money coming to you destined for Client Account
• 501 “Costs incurred on behalf of Client Account” used for money spent by you on behalf of Client Account
• 310 “Partner grants” used for transfers between Client Account and your account (in either direction) to complete either of the first two cases
• 600 “Owed by Client Account to us” only to be used when deliberately meaning to change the amount owed by the client account.

Funding type tracking code

You can set up a “Client Account pass-thru” choice under the Funding Type tracking code.  (See “Setting up donor/project tracking code” but transpose for a “Funding type” category – the second of the two categories available). This will allow you to distinguish Client Account transactions in Xero from your own transactions. As noted above, though, we assume it is to be used only for cases where Client Account money passes through your bank account without any net effect on your own Revenue & Expenditure reporting or balance sheet. The tracking allows us to filter out the client transactions.

Two principal cases for use of the “Client Account pass-thru” coding are:

  1. Money destined for the Client Account bank account has for some reason had to be paid into your bank account first and is then transferred into the Client Account bank account, and
  2. Money to be paid by the Client Account bank account has for some reason had to be paid to your bank account first and is then transferred to the third party directly by you.

Not also that if money is passing from one bank account to another account (e.g. Bank to PayPal or vice versa) and these are truly your own accounts – not accounts holding money for other beneficiaries- , then this is a pure “Transfer” transaction. Use the Transfer tab on the Xero reconciliation tab. No accounting or tracking codes are applied to these transactions since they are purely internal fund movements.

Expenditures matched by revenue

Please read the section on “Funding type tracking code” above before considering the cases below.

Money paid to you but destined for Client Account

Receipt of the money:

  • Use an account code such as 265 “Income for Client account”
  • Use Funding type code “Client Account pass-thru”

Spending the money:

  • Use account code 310 “Partner grants” (Cost of sales)
  • Use Funding type code “Client Account pass-thru”
Money from the Client Account to you to be paid to a third party

Receipt of the money:

  • Use account code 310 “Partner grants” (YES even though receiving it)
  • Use Funding type code “Client Account pass-thru”

Spending the money:

  • Use an account code such as 501 “Costs incurred on behalf of Client Account”
  • Use Funding type code “Client Account pass-thru”

Expenditures not matched by revenue

This means expenditures not immediately matched with covering revenue such as:

  • You pay a supplier bill covering both your own and Client account expenditures
    • Therefore to be split between them
  • For whatever reason you happen to have paid a third party for a Client Account expense from your own account instead of the Client account
  • The Client Account happens to have paid a third party for an expense which is really yours

You pay a supplier bill covering both your own and Client account expenditures

For the relevant account (e.g. your main bank account, PayPal account, or Petty Cash)

  • Use an account code such as 501 “Costs incurred on behalf of Client Account”
  • Use Funding type code “Client Account pass-thru”
Client account payments have been made from your Petty Cash box

If possible, rectify this immediately by transferring from Client Account petty cash to your petty cash.

If that has not been done, then in Xero Petty Cash account:

  • Enter a new Spend Money transaction for the amount
  • Use an account code such as 501 “Costs incurred on behalf of Client Account”
  • Use Funding type code “Client Account pass-thru”
Client Account has paid an expense which is really our expense

On becoming aware of the expenditure made in the Client Account, create in Xero a Bill from the contact “Client Account” for the relevant expenditure, coding the item or items to their respective expenditure codes. DO NOT set any Funding Type code unless the expenditure was for a Restricted project/donor. Set the Donor/Project code as appropriate, if relevant.

If there is already an unpaid bill for the Client Account, you could alternatively simply add one or more lines to the bill and adjust its total value appropriately. (You will not be able to edit the bill if it has been paid.) Doing it this way makes it a bit easier to match a single payment to the amount owed to the Client account.

Adjusting balance owed to/owing from Client account

This involves using manual journals and hence should be undertaken by the appropriate person for doing that.

You can establish net flows to or from the Client account by using the filter: Funding Type = Client account pass thru on an income and expenditure report. Set the starting date for this report the day after the last change of this kind made to 600 “Owed by Client Account to us”. So make sure that such entries are clearly signalled.

If, using the procedure above, there is a net inflow or outflow at the year-end or another time when you want to record the balance owed, then a journal entry can be made at that time:

  • If client account income exceeds expenditure, credit 600 “Owed by Client Account to us” for the difference and debit Income for Client account
    • Do not set any tracking codes
  • If client account expenditure exceeds income, debit 600 “Owed by Client Account to us” for the difference and credit “Costs incurred on behalf of Client Account”
    • Do not set any tracking codes

Once you have made any such journal entries, update the related income and expenditure report to check there is now no net flow in either direction.

Paying amounts due: Client Account

As noted earlier, try always to complete both elements of pass-through payments at the same time so that there is no change in any amount owed to you or by you in relation to the Client account.

Given that, it is recommended that the amount owed is reviewed not at every transaction but at regular intervals, for instance quarterly or every 6 months. When you do this, first check for adjustments to be the amount owed. Then decide if you want to pay off only part of what is owed or all of it.

Client Account paying money due to you

This is the case of the client account paying you back for payments you made WITHOUT a clean “pass-thru” arrangement by which you had received the payment in advance from the Client account for a specific purpose.

For the account receiving the money from the Client Account (probably main bank account)

  • Identify and reconcile the relevant bank transaction
  • Use an “Asset” account code such as 600 “Owed by Client Account to us” (or equivalent you have set up)
  • Leave Funding type code  blank

Note that if you try and have the Client Account pay only a reduced amount because of an offsetting bill owed to it by you and already created in Xero, then the accounting for the transaction gets tricky. For the sake of keeping things simple to understand and execute, it is recommended to keep the two payments going in different directions rather than process a single, net payment.

Paying Client Account money due to it

In the account used for paying the money (probably main bank account):

  • Identify and reconcile the relevant bank transaction
  • Find and Match to the related Client Account bill or bills
    • Use “Split” feature if necessary
  • Leave Funding type code  blank

If you transfer money to the Client account simply to increase the balance of that account, then for your account paying the money (probably main bank account)

  • Identify and reconcile the relevant bank transaction
  • Use account code 600 “Owed by Client Account to BLNSS”
  • Leave Funding type code blank