Why your Xero accounts should match your year-end accounts

TLDR: Your Xero accounts should provide an accurate ongoing record of your business, including appropriate adjustments made when your year-end accounts are prepared. Although reports in Xero will not necessarily look identical to statutory accounts, the underlying ledger should reconcile to the final year-end figures. If adjustments are made elsewhere and never reflected in Xero, you could start the new financial year using inaccurate balances.

What happens when your year-end accounts are prepared?

The figures in Xero at the end of your financial year are an important starting point for preparing statutory accounts, but they are not always the finished figures.

During the year-end process, your accountant reviews the bookkeeping and identifies any adjustments needed to make sure income, expenses, assets and liabilities are recorded correctly.

These adjustments might include:

• Depreciation on fixed assets
• Accruals for costs relating to the year that have not yet been invoiced
• Prepayments for costs relating to a future period
• Payroll corrections
• Director's loan account adjustments
• Tax-related entries
• Corrections and reclassifications

These are normal parts of the year-end accounts process.

Xero itself describes adjusting journal entries as entries used at the end of an accounting period to update balances, including areas such as accruals and prepayments. Read Xero's guide to journal entries.

The important question is what happens to those adjustments once the statutory accounts have been completed.

Why should year-end adjustments be reflected in Xero?

An accountant may use the information in Xero to prepare year-end accounts and then make final adjustments within separate accounts production software.

That can produce correct statutory accounts.

The problem arises if the appropriate adjustments are never reflected back in the underlying Xero records.

Imagine your statutory accounts show one figure for a loan, an accrual or a director's loan account, but Xero still shows the figure that existed before the year-end adjustments.

The filed accounts may be correct, but the live accounting records have effectively been left behind.

For a business owner who uses Xero throughout the year to understand performance, this can create unnecessary confusion.

Does Xero need to look exactly like the statutory accounts?

No, and this is an important distinction.

Your Xero reports and your statutory accounts do not necessarily need to look identical.

Statutory accounts have specific presentation and disclosure requirements. Figures may be grouped together or presented differently from the reports you normally view in Xero.

What matters is that the underlying accounting records have been correctly updated and can be clearly reconciled to the final accounts.

For example, several expense categories shown separately in Xero could be grouped together under one heading in the statutory accounts. That does not mean there is a problem.

The issue is whether the underlying balances and appropriate year-end adjustments are correct.

What happens if Xero does not reconcile to the final accounts?

Leaving adjustments outside the accounting system can create several problems.

The new financial year can start with the wrong balances

Your closing balance at the end of one year becomes the opening position for the next.

If appropriate year-end adjustments are missing from Xero, the new year's records can begin from a position that does not reconcile to the completed accounts.

This can make future accounting more complicated.

Management information can become less reliable

Many growing businesses use Xero for much more than bookkeeping.

They may look at monthly profit, balance sheet figures, cash flow and management reports to make decisions.

If the underlying records have not been brought into line with the final year-end position, some of that information may be misleading.

A director could reasonably assume that the figures displayed in their accounting system are the most accurate figures available.

Good financial decisions depend on reliable underlying data.

What happens if you change accountant?

Differences between Xero and the previous statutory accounts can also create problems when a business changes accountant.

The new accountant may begin by comparing the accounting records with the last set of completed accounts.

If the figures do not reconcile, they then need to work out why.

Was an adjustment made outside Xero? Was something incorrectly recorded? Is there a genuine error? Were journals prepared but never posted?

Time can be spent reconstructing decisions that should already be visible in the accounting records.

Keeping Xero reconciled to the year-end position creates better continuity and makes the accounting history easier to understand.

Xero provides reconciliation reports including the trial balance, aged receivables, aged payables, fixed assets and journal reports to help review accounting records at the end of a period. See Xero's reconciliation reporting guidance.

Why accurate Xero accounts matter throughout the year

One of the major benefits of cloud accounting is that business owners can access financial information throughout the year rather than waiting for annual accounts.

That benefit depends on the quality of the information in the system.

If Xero is going to be used as the live financial record for a business, it makes sense for the year-end process to strengthen those records rather than create a separate version of the numbers elsewhere.

Accurate records provide a better foundation for management accounts, forecasts, tax planning and future decisions.

They also give directors greater confidence that the numbers they are reviewing have continuity from one financial year to the next.

What should happen after your year-end accounts are completed?

Once the accounts have been finalised, appropriate year-end adjustments should be reflected in the accounting records and the closing position should be reconciled.

This does not mean simply copying every line of the statutory accounts into Xero.

It means making sure the underlying ledger accurately reflects the completed year-end work and that there is a clear reconciliation between Xero and the statutory accounts.

Xero increasingly describes connected bookkeeping and year-end accounting as providing a consistent set of records rather than rebuilding figures separately at year end. Read more about Xero's company accounts approach.

Keep your accounting records working for your business

Year-end accounts should not be viewed as a completely separate exercise from the financial records you use throughout the year.

AGILE Accountants makes sure appropriate year-end adjustments are posted back into Xero so the underlying records reconcile to the completed accounts. This helps ensure the next financial year starts from the correct position and gives business owners greater confidence in the numbers they use to run their company.

If you want your year-end accounts and ongoing financial records to work together, speak to AGILE Accountants about keeping your Xero accounts accurate, reconciled and useful throughout the year.