Xero – Xero Lesson 7 – Owners / Shareholder’s Equity

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Here is basically a cut and paste of the write-up from the equivalent lesson for QuickBooks Online. The fact that I can do this, is further proof, that the fundamentals are exactly the same, no matter the software.

Before you can understand how to manage owner’s equity in Xero, you must understand the fundamentals of owners equity.

When you invest in your business, you increase the equity of your business. When you take a distribution, you decrease the equity of your business.

Equity, or shareholder’s equity, or owners equity, or partner, or member capital, all mean the same thing. What is the book value of the business as of a given date?

When we talk about Owner’s Equity in Xero, we’re simply talking about, how the Xero Accounting software let’s us manage owner’s equity.

This is best described in terms of the transactions that impact owner’s equity in Xero.

Equity is in the bottom most part of the balance sheet. If you take your assets, and subtract your liabilities, you have owner’s equity. This is how the balance sheet balances.

Equity accounts work just like liability accounts. They are increased by credits, and decreased by debits. If you follow the cash, in a simple investment transaction, it makes sense.


Invest $1,000 into your business, and the entry is:

Debit Cash           $1,000

Credit Equity                       $1,000

If you can get this basic foundation of Equity down, then the rest is easy to figure out.


Now let’s take this one step further. Your small business owner client comes to you and says, “Hey I got a bunch of inventory that I paid for out of my own pocket. How do I book that in QuickBooks?”

This is actually about 3 steps further. Let’s see what this looks like in the video – you have to bring the inventory onto the books, with the appropriate quantities and values, but they’ll never be paid for.

The simple entry is to record an owner contribution of inventory on the books is:

Debit             Inventory

Credit                                Shareholder’s Equity

The problem with posting a journal entry, is you won’t have the right inventory tracking by item.

Let’s see how to post the two types of equity transactions above, in the video on QuickBooks Online – Shareholder’s Equity.

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Xero – Xero Lesson 6 – Customer Deposits

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When a customer pays you in advance, we have a few words for it, starting with, “fantastic!”

We call these retainers, customer deposits, pre-paid revenue, or revenue paid in advance. I’m sure you could increase the list!

Bottom line on customer deposits (or whatever you call it) is that you have a liability to record, and you want to track that through an invoice, so that you can invoice your customer for it.

Then we need a way to manage the customer deposits account, so we can quickly determine, who has how much on deposit with us. We also need to be able to prove how and where those deposits are applied.

The management part will be handled through the reporting.

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Xero – Xero Lesson 5 – Accounts Payable

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Accounts Payable is an area that can handle many transactions. Those transactions can potentially impact a number of different areas on the financial statements.

We can enter a bill to pay a pre-paid expense, which is an asset on the balance sheet.

We can purchase a Fixed Asset. We saw how this works in the lesson on the Expense Cycle.

We can purchase inventory. We saw that in the previous lesson, but we’ll do it again in this one.

Finally, we can of course book a bill for a good old fashioned expense.

Out of the above, only one transaction impacts the income statement!

Watch the video to see what this looks like.

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Xero – Xero Lesson 4 – Accounts Receivable

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Back to T-Accounts!

We’ve already looked at the revenue cycle in Xero, but now we’re going to take a deeper look at the accounts receivable part of the revenue cycle. We’ll look at another invoice, and how that impacts A/R. Then we’ll discuss what I reference earlier in the course, about receiving payments.

In other accounting software, the process for receiving payments on invoices, is just that. It’s a process. With Xero, it CAN be done that way, but Xero is built to handle this much more efficiently through the bank feeds.

We’ll look at how to analyze your receivables in Xero.

Then we’ll look at how to book the payment directly through the bank feeds, and get the deposit reconciled all at the same time.

 

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Xero – Xero Lesson 3 – Banking and Bank Feeds

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The bank feeds are very much central to how Xero is built to work. Everything centers around them. I mentioned earlier in the course, that you really wouldn’t every record a payment that you made with your debit card in Xero, until the following day, when that transaction is downloaded from the bank. That’s when you’d book your office supplies purchase.

The idea behind how Xero’s banking works, is that you reconcile daily. You can run your monthly reports, and cut the dates off based on the same dates that your statement shows, to be sure everything agrees.

You are not going to reconcile your bank accounts in the traditional sense, when you’re using Xero. In other words, you will not enter the ending balance, and check off items. Xero calculates the balance per bank every day, based on what was downloaded. The difference between that, and the balance in Xero would be the un-reconciled items.

You can manually reconcile an item in Xero, but it’s highly recommended that you don’t, unless you really know what you are doing.

As long as you set your bank accounts up with the right starting balance, and you don’t duplicate transactions by manually reconciling, or delete reconciled transactions, your bank feeds should work perfectly, and seamlessly.

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