Manage funds in and out of your business
Many small business owners (and property investors etc) need to top up their business with personal cash. They also sometimes need to take drawings from the business.
Following are some common scenarios for recording funds taken or funds introduced in Xero. By default, Xero's owner equity accounts already have the payments option enabled. To enable payments on any other account you need to edit the account in your chart of accounts.
How to record a business expense paid for personally
There are two options in Xero to record personal payments for business expenses, for instance if you've charged things on your personal credit card that were for the business - in either case personal expenditure should be recorded by the business as an Expense Claim.
Option one: payment is reimbursed with cash
This will typically be used by employees of a business who are not expected to fund the business at all.
Enter the receipts into an Expense Claim (or as many as required) as soon as the item is purchased.
- Mark the Expense Claims as paid, taking note of the total.
- In your online banking, transfer the total from your Xero business account to your personal account.
- When the payment shows as an imported statement line the expense claim can be reconciled to the payment.
Option two: payment is not reimbursed and is treated as funds introduced
This is often the case for small businesses where items are paid for personally, for example using your personal credit card because you wanted to get airpoints, and need to be shown in the accounts despite no reimbursement being required. Using Xero's default account 'Owners Contribution' you can increase this as 'non-cash' owner's equity directly off the expense claim entered into Xero.
- Once approved, you can pay the Expense Claim out of any account in your chart of accounts rather than as cash from your bank account.
- You can set up any account in the chart of accounts to take payments from - add or edit an account to have the 'enable payments' option checked. Check this option on the 'Owners Contribution' account so that Expense Claims can be 'paid' as funds introduced.
- If you want to take back the funds introduced into the business at a later stage, you can do this by 'taking drawings'.
- Alternatively a manual journal can be entered where neither of these scenarios apply.
How to record a personal expense paid for with business funds
In many cases you might purchase a personal item using a business credit card - these personal expenses put through the business are treated as drawings.
Enter the personal spending as a Spend Money transaction in the credit card account and code it to the default 'Owners Draw' account - you can do this before doing your bank reconciliation.
If you want to enter the transaction during reconciliation, wait for the statement line to be downloaded from your online credit card and enter the details in the create tab.
In either case, use the default Xero drawings account to record this personal spending.
How to take cash drawings or introduce cash
Cash taken directly from the business for personal use is treated as drawings and cash deposited directly into the business is treated as funds introduced.
- Enter a cash drawing into Xero by adding a spend money transaction in the business bank account the money is being taken from. Code it to the 'Owners Draw'.
- Enter cash introduced into Xero by adding a receive money transaction in the business bank account the money is being deposited into. Code it to the 'Owners Contribution' account.
- You can do this before doing your bank reconciliation or during reconciliation when the items comes through as a statement line downloaded from the business bank account.
- Xero's default chart of accounts contains accounts for both - drawings and funds introduced.