Xero in on Xero; An Overview of Bank Rules

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The first major step in any accounting or bookkeeping process is recording and classifying transactions. Taking your transactions from your source documents and getting them into your accounting software gives the user the information needed to create financial reports, analyze data and make decisions to better the business. However, getting that information into your accounting software timely, consistently and correctly can be a struggle for any business. Xero makes this process easy through Bank Rules.

Xero’s bank feeds allows us to bring in bank transactions automatically or through an import to allow us to record and match these transactions in Xero. For the transactions that we are recording to the ledger directly from the bank feed, we can utilize Bank Rules to speed this process up. Bank rules are a time-saving way to record and reconcile regular bank statement transactions based on conditions that you set up for each rule. These rules automatically run when you go to reconcile bank transactions if the conditions are present for any of the unreconciled transactions. Instead of entering the contact and the general ledger account for that transaction, the bank rule automatically creates that information in Xero and all you have to do is click “OK” and that transaction is recorded and reconciled.

Setting up a bank rule first starts with creating the condition for the bank rule to be triggered. The condition will be based on the information coming through the bank feed. For example, if we wanted to create a bank rule for transactions coming from Starbucks, we could create a condition that says if any text field contains Starbucks, that we want this rule to run. We have the ability to narrow this down to a specific text field, like a Payee or a Description, have multiple conditions needed for the rule to run or have the rule run when exact text comes through the bank feed.

Once we have the condition selected, we need to input what we want Xero to do when the condition is triggered. We first need to identify what contact we want to assign to the transaction.  In our example, we would input Starbucks into this field. We then need to input what general ledger account we want this transaction recorded to. We can allocate fixed items or split the transaction among multiple accounts. Once the general ledger accounts have been assigned, we then have the option on setting a reference from this transaction either from information pulled from the bank feed or by entering it manually during the bank reconciliation process. We can also determine if we want this bank rule to run on one particular bank account or for all bank accounts. Finally, we need to give a title to this bank rule so we can differentiate it from the other bank rules that we create.

Once we save this, the bank rule will now be in place for any transactions we are reconciling in the future. We can create bank rules for spend money transactions (outgoing cash - expenses), receive money transactions (incoming cash - revenue), and transfer money transactions (transactions between two bank or credit card accounts).

One benefit to setting up bank rules is that it will speed up the process of recording and reconciling bank transactions. With rules set up for common or recurring transactions, each time that a transaction comes through our bank feed, we can simply click OK and record the transaction. We do not need to input the contact and general ledger account each time. We can also use the cash coding feature to bulk reconcile all of the bank transactions that have bank rules in place at once. The more bank rules we have setup, the faster our bank reconciliation will be.

Another benefit is the consistency in the general ledger accounts that the transactions are recorded to. If we are are recording and reconciling the transaction manually, we need to remember what account we recorded that transaction to in the past in order to be consistent.  If we record that transaction to a different account than what we did in the past, our financial reports will be inconsistent with previous periods. With bank rules in place, the transaction gets recorded to the same account each time, mitigating inconsistency between periods.

Utilizing bank rules is a powerful tool to record and reconcile your bank transactions. By putting bank rules in place, it makes the bank reconciliation process quicker and more consistent so that you have the data needed to make decisions for your business.

Xero Pro Tip: If you go to cash coding, you can sort transactions by vendor. When setting up a client, see which vendors they spend money at most and create bank rules for them first. You will get the most bang for your time here!

Author Bio: Joshua Lance is the founder and Managing Director of Lance CPA Group, a virtual CPA firm that focuses on providing accounting and consulting services to craft breweries and digital agencies. A licensed Certified Public Accountant and Chartered Global Management Accountant, Josh is also a family man who calls Chicago home.  Before venturing on his own with a mission to help small businesses, Josh spent his early career at a top-10 national public accounting firm before working at an ultra high net worth family office. Josh is also an adjunct lecturer at Northwestern University in Evanston, IL teaching in the Farley Center for Entrepreneurship and McCormick School of Engineering.  He enjoys making wine at home, cooking, traveling, and cheering on his favorite football and soccer teams. Josh was honored by being selected to the 2017 class of the AICPA Leadership Academy and was named as one of the 40 under 40 in 2017 and 2018 by CPA Practice Advisor.