Cash Accounting

Modified on Sun, 17 Dec 2023 at 10:09 PM

Setting up for Cash Accounting

Cash Accounting should never be enabled for Xero Users

  • Selecting cash accounting options in the accounting settings
  • Link system accounts for cash basis receivables/Payables adjustment (in the same sections as the A/R and A/P and the net balance for A/R and unallocated income should be zero at all times. This is just a holding account because we run a double-entry GL mechanism.
  • Setup allocation preferences for each income and expense account
  • Accounts with the same number will receive a pro-rata allocation
  • "Natural allocation" in the US is

- Finance Charges

- Purchases paid by firm on behalf of client (hard disbursements)

- Disbursements

- Fees

Legally in the US paid by firm hard purchases are a balance sheet asset (non-interest bearing loan to client).

Cash Basis Income Statement

No changes are required because the posting will go to the Asset or liability primary sections which do not appear if not paid.

Balance Sheet

Options to:

  • Consolidate trust bank and liability into a singe asset line item called trust surplus.
  • Do not show zero-dollar headings (if the child accounts add up to zero)
  • Don't have to worry about CYE or Retained earnings because these will come through from income statement.

Posting (Saving) Invoices/Bills – Cash Basis

This will post to the GL. For receivables is will debit A/R and credit cash basis receivables adjustment resulting in a net-zero affect on the assets.

Payment Allocations – Cash Basis

This will also be an issue with trust payments for invoices. Under normal circumstances they will receive payments for full amounts and then we will just do a natural allocation (full allocation).

For partial payments that only affect one invoice then the payment will be applied "naturally", but if they want to partially allocate to several invoices then they will need to decide how to allocate before making the bulk payment. If they want to override the "natural" allocation order then they will need to select the partially-paid invoices from the invoice list and open up a new screen that will allow them to re-allocate the payment to different line items.

When the payments are posted the GL transaction will debit cash-basis receivables adjustment and debit the allocated line item income/expense accounts.

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