Before You Start

This guide assumes you are familiar with Xero’s invoicing and bank reconciliation features. Administrator access to your Xero organization is required.

Overview

25 min
Setup Time
Intermediate
Difficulty
Monthly
Maintenance

What You’ll Learn

  • How to identify common ‘Undeposited Funds’ issues in Xero
  • Strategies for matching payments to the correct bank deposits
  • Steps to clear out aged or unmatched transactions
  • Best practices to prevent future discrepancies

1. Preparation Steps

Before diving into cleanup, ensure you understand how payments flow into Xero’s clearing accounts:

Key Accounts to Review

  • Sales Income (Account type: Revenue)
  • Bank Account (Account type: Bank)
  • Accounts Receivable (Account type: Current Asset)

Optional (but recommended)

  • Clearing Account (Account type: Current Asset, if not using a default)
  • Payment Processor Fee Account (Account type: Expense)

2. Understanding Xero’s Clearing Accounts

Xero doesn’t have a direct “Undeposited Funds” account like QuickBooks, but it uses clearing accounts and its bank reconciliation process achieves a similar goal.

Method A: Direct Payment to Bank Account (Misconception)

This method bypasses Accounts Receivable.

Pros:
  • Seems simpler initially.
  • No extra clearing account.
Cons:
  • Hard to match multiple payments to single deposit.
  • Skips AR ledger update.
  • Can lead to reconciliation errors.

This is the correct approach for robust reconciliation.

Expert Tip: Always record customer payments against their invoices, which moves them into Accounts Receivable. Then, when the bank deposit appears, match it against the multiple payments, not direct sales.

3. Step-by-Step: Clearing Aged Transactions

Here is the high-level workflow for a clean Xero setup.

This diagram shows how customer payments should flow through Xero for clean reconciliation.

Here is a sample code block to show how a Xero API payment object might look.

{
  "PaymentID": "a1b2c3d4e5f6g7h8i9j0",
  "Date": "2025-01-15",
  "Amount": 150.00,
  "Invoice": {
    "InvoiceID": "z9y8x7w6v5u4t3s2r1q0"
  },
  "Account": {
    "Code": "090"
  },
  "CurrencyCode": "NZD"
}

4. Practical Cleanup Steps

  1. 1

    Identify Unreconciled Bank Lines

    Start by reviewing your bank statement lines that are awaiting reconciliation. Focus on deposits that don’t have an obvious match.

  2. 2

    Locate Unpaid Invoices / Overpayments

    Run the ‘Aged Receivables Detail’ report. Identify customer invoices marked as paid but without a corresponding bank transaction, or overpayments sitting idle.

  3. 3

    Match Payments to Deposits

    For deposits in your bank feed, use ‘Find & Match’ to group multiple customer payments that make up that single deposit. Ensure the total matches.

Common Error: Duplicate Payments

Ensure you’re not double-recording payments – once directly to the bank account and again against an invoice. This inflates income and bank balances.

5. Preventing Future Discrepancies

Best Practices Checklist

  • Regularly reconcile bank accounts (daily/weekly)
  • Always apply customer payments to invoices first
  • Train staff on correct payment recording procedures
  • Review Aged Receivables monthly for outstanding issues

Need Help?

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Having trouble cleaning up your Xero accounts? Our team specializes in Xero reconciliation and can help troubleshoot your specific workflow.

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