I had a fun challenge recently – accounting for a property purchase in Xero where a third party had paid grant funding directly to the vendor. As it took me a while to work it out, and I couldn’t find what I was looking for online, I thought I’d set it out here.
Some of this advice also applies if you need to account for any kind of purchase where a third party has paid the supplier directly. Or if you are accounting for a property purchase in Xero where you have already paid a deposit but only received an invoice at completion. This post assumes that you have reasonable prior knowledge of accounting for invoices, bills, receipts and payments in Xero.
The charity had bought a building for £2m + VAT. They had paid a deposit of £200K several months earlier, which had been accounted as a “Receive money” transaction into the Prepayments code (620). The building was part grant-funded by another organisation, which paid £1m directly to the vendor.
At completion therefore, the charity needed to pay £1,200,000. (£2,400,000 for purchase including VAT, less deposit paid of £200,000 and less the £1m that the vendor received directly). They received a VAT invoice a few days later. They are registered for VAT and have opted to tax the building, so they are able to reclaim the VAT. So the question is, how to account for this property purchase on Xero?
What needs to be accounted for
Whenever I have an accounting problem to work out, it’s usually best to start at the end – what do I need to end up with in the accounts? In this case I want to see;
- a property asset of £2m on the balance sheet
- grant received of £1m
- a VAT debtor (for reclaiming VAT) of £400,000
Please note, this post is not intended to be accounting advice – in some cases, if a third party has joint-funded an asset, the substance of the transaction may be more complicated than I have shown here. That is, you may not have full ownership rights over it. This post is to illustrate how to account for this particular property purchase in Xero.
If I was posting this as a journal, it would look something like this:
|620 – Prepayments||£200,000||Move prepayment to Asset|
|740 – Buildings||£200,000||Move prepayment to Asset|
|201 – Grant Received||£1,000,000||Account for grant|
|740 – Buildings||£1,000,000||Account for Grant|
|740 – Buildings||£800,000||Account for completion payment|
|820 – VAT||£400,000||Account for completion payment|
|001 – Bank||£1,200,000||Account for completion payment|
However, in Xero you can’t (or at least shouldn’t) post directly to the VAT account. And there isn’t a neat way to “Spend Money” to account for the last three lines because if you enter £800,000 as the cost you would need to create a new 50% VAT code to get the right amount showing, which feels like a very messy hack.
And what if you also needed to create an invoice for the grant? Perhaps this is only part of the total grant payable, for example.
In Xero, by default, you can only settle bills (and receive money from invoices) against bank codes. However, you can change this to designate a balance sheet code as a settlement code. In this case, I will designate the prepayments code (620) for this. This is a useful trick generally for cases where you have paid a deposit for something but won’t receive the invoice until the final product is received.
In Advanced Settings > Chart of Accounts, you can select the account code you want to use, and there is a tick box at the bottom as follows:
If that box is ticked, you can use this code instead of a bank account to both settle bills and receive money from invoices.
Here is an example screenshot of what it looks like when enabled – this is at the bottom of an (accounts receivable) invoice screen. It looks exactly the same at the bottom of the bill (accounts payable) screen except that it says “Make a payment” instead of “Receive a payment”.
What to post
In my example, the charity had already used account code 620 for the initial deposit, so I opted to use it for all of the other transactions too.
Firstly, I recognised the bill for £2m plus VAT by accounting for this as a normal bill, coded to 740 – Buildings. (If you are using Xero Fixed Assets, this method also has the advantage that when it comes to recognising the building in the fixed assets register, it automatically picks this up as one asset, whereas if you account for it in several stages you have to manually intervene).
I then allocated the completion payment of £1.2m against this invoice, i.e. showing it as a part payment. This means that our bill now shows £1.2m outstanding.
Next, I allocated the deposit against this bill, by going to the bottom of the bill screen and entering the amount of the deposit against the Prepayment code. This takes us down to £1m outstanding.
Then I accounted for the grant. Firstly, I set up a new invoice (receivable) in Xero for £1m, coded to the grants receivable code (201). Then, at the bottom of the invoice screen, I “received” the payment into account code 620.
Finally, I went back into the property purchase bill, and made a further payment of £1m from account code 620.
Ta-da! We now have an asset of £2m, and a VAT invoice correctly entered showing £400,000 reclaimable. We have accounted for the grant income directly against the grantor, which may be useful for reporting purposes later. Account code 620 shows a zero balance.
There are other ways to approach accounting for property in Xero (as well as deposits) and as I said earlier, it’s important to make sure you are accurately reflecting the substance of your transaction, so this example may not work exactly for your situation.