Bank Reconciliation

The bank account will typically have 10-15 transactions to reconcile (this example here is a bit unusual due to high activity during the period, and me running it a little late this time).

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Xero will attempt to match a bank transaction with a known Invoice from harvest or bill from Gusto. If it finds one it will highlight the match in green and give you an "OK" button to simply reconcile the transaction instantly.

More frequently (with Gusto in particular) the cash payments don’t line up 1-1 with the Gusto bills. Gusto also does not create bills for our international contractor payments, so those you have to check manually.

Invoices

If an incoming check matches the amount of an outstanding invoice, it will show in green. However, watch out for situations where a check amount matches multiple invoices. In these cases the wrong invoice may be selected. Use Chase to actually look at the physical check and ensure you are matching it to the right invoice in Harvest.

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Harvest does not automatically mark invoices paid when they are paid in Xero. You have to do that manually. Go into Harvest and click "Record Payment" to confirm the payment was made and on which date.

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If a payment includes two invoices, you will have to click "Find & Match" in Xero and then check the invoices for which the payment applies. If the totals match you will get a satisfying green button.

Payroll (Gusto)

We use Gusto to pay:

  • Domestic W2 employees
  • Domestic 1099 contractors
  • International contractors

Each of these categories has a slightly different workflow. I will generally do the contractors first, since the transactions are easier, and it makes it easy to see which transactions go with the W2s, which is a bit of a complex tangle.

International Contractors

They do not come in to Xero as a bill, so you have to go to Gusto, click "Payroll History", then click "International Contractor Payment History" and manually line up the transactions.

Since these folks can’t log in to Gusto to add expenses, any expenses they have will come through Xero. Make sure that you review Xero for approved expenses from the pay period, because those should be separated from the person’s pay in Xero. We will typically note when there is an expense involved in someone’s payment. Check Xero for that expense.

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We have some international contractors we pay through ACH/Wire in Chase because their countries are not yet supported by Gusto. If you see a wire transfer or ACH you don’t recognize, check our ACH/Wire activity in Chase for a matching payment.

Domestic Contractors

Domestic contractors do get added individually as a "Bill" in Xero and so typically Xero will automatically line up the cash transaction with the Bill based on the amount. These are generally very straightforward.

W2 Payroll

We run payroll twice a month. We generally run it as soon as the pay period closes, and it is paid out on the subsequent 1st or 15th. As soon as we run it, Gusto creates a "Bill" in Xero representing the payroll, and the expense shows as AP on our balance sheet and an expenditure on our income statement.

Generally I will review the "Cash Requirements" PDF that Gusto creates for each payroll. This breaks down the sub-payments. Often I will find out what each payment goes with by reviewing the "Debits Summary" in the Cash Requirements PDF. Typically the charges are broken into:

  • Direct deposits to Employees
  • Tax payments to government (Employee and Employer)
  • Reimbursements

Handling Reimbursements

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The first thing to do is update the Reimbursements. These come through as a single line item in the Gusto bill but need to be split out properly by expense type in our books. You have to do this in the Bill in Xero before applying any payments to the bill. Once you apply a payment you can’t modify the line items of the bill anymore. Go to "Business" → "Bills to pay" and find the payroll you are about to reconcile. Find the line(s) for Reimbursements. In the relevant payroll in Gusto, open the Paystubs CSV. This will show each reimbursement that was covered with this Bill. Edit the bill so that each reimbursement is on its own line and is properly broken out by type.

This is the original state the reimbursements come through from Gusto.
This is the original state the reimbursements come through from Gusto.
The Payroll PDF shows all reimbursements the employee has gotten this year even if they are $0. Just pull in the ones with a value for this particular payroll.
The Payroll PDF shows all reimbursements the employee has gotten this year even if they are $0. Just pull in the ones with a value for this particular payroll.
I removed the blanket "Reimbursements" line and replaced with individual lines for each specific reimbursement, in the right place.
I removed the blanket "Reimbursements" line and replaced with individual lines for each specific reimbursement, in the right place.

Once this is done, you can associate the bank transactions with the Gusto bill. Match each sub-expense with the larger Gusto bill it goes with. Use the "Split" tool to split the bill cost into multiple chunks. Each payment will get counted against the larger Bill.

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For the last payment you should be allowed to simply check the bill, as it will have been "split" into chunks and the last chunk should match the last bank transaction associated with the payroll.

Service Fees

Gusto also charges us a service fee each month which is not connected to any payroll expenses. This is noted as "Fee" in the description, and is logged as a Software expense.

SBA Loan

We have an SBA 7(a) loan with Five Star Bank. The payment is auto-deducted every month. We split it out between the principal payment and the interest payment. To find out the right amounts, log in to the Five Star Secure Portal with our credentials (shared securely in a separate communication).

Click the loan (it is the only one we have with them). The payment history will show the split between interest and principal.

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Use Xero’s Find and Match to split the cash payment into the two portions.

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Other Typical Transactions

  • Chase charges us a monthly fee for our wire transactions:
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  • We currently have two credit cards with Chase (migrating from one to the other to get more points). Our credit card balances are paid automatically each month. Book these as a "Transfer" to the Credit Card account.
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Notes

  • Once the bank reconciliation is complete, the bank balance in Xero should match the balance in Chase. This is currently the case as of November 2021 and future deviations will be due to issues since then.