Xero Tip Of The Month June 2017 - Payment Types In Xero

Xero has multiple ways of recording transactions that many users aren’t aware of. These are “Prepayment”, “Overpayment” and “Split Payment”. These transaction types are actually variations of the standard Spend/Receive Money bank transactions but they have very unique treatments. These transaction types allow you to record money received from a customer (or paid to a supplier) BEFORE an invoice has either been issued or received.

You access these from the Spend/Receive Money entry screens from the Manage Account menu, or simply by adding detail when creating a transaction from the bank reconciliation screen, with the default set as “Direct Payment”.



The prepayment function in Xero is specifically designed to manage the sales/purchase tax implications of receiving funds or making payments, particularly on the cash accounting scheme where the tax point is the date payment is received or made.

If you were to post funds received before an invoice has been raised as an overpayment, the balance paid would sit as a credit to the sales/purchase ledger until an invoice is available to allocate it to, therefore not accounting for sales/purchase tax, this is explained in more detail below.

When using a Prepayment you need to specify a ledger code. If you enter a P&L code here (such as sales) it will show up as revenue in that month (and then get reversed out when the final invoice is issued. If you do not want it to show as income then you should code it to a Prepayments (Balance Sheet) account. If sales tax needs to be reported on this transaction then you should ensure that you use the correct tax rate (if you do this regularly then you may want to change the default tax rate for the Prepayments account so you don’t forget to change it each time).

When you invoice for the job you should ALWAYS invoice for the full amount (as if the deposit hasn’t been paid) and charge the full sales tax. Then apply the Prepayment credit against the total invoice.


Overpayments are ideally suited for recording those times when your customer pays you twice, and you will hold the funds to be applied against a future (and unknown) invoice. Similarly this can be used when making payments on account to suppliers for expenses such as electricity which may be invoiced quarterly. You can not change the coding or tax treatment in any way. No revenue/expenses will be recorded, your Accounts Receivable/Payable balance will reflect that you owe or are owed the money where applicable. The payment will show up as a single line on the statement.

As long as you have no need to report this on a Sales Tax Return then this should be your default option.

Split Payments

Sometimes a customer may make a part payment against an invoice that you have issued, therefore the money received can not be matched up with the invoice in the receivables ledger. This scenario may also occur in the purchase ledger where you are gradually paying off an invoice received from a supplier.

When this occurs, a split payment may be applied to any given invoice acting as a part payment. Any split payments applied to an invoice can be clearly seen by drilling down into that invoice. Any payments applied will be listed below the total amount, which itself will be the outstanding balance remaining after these reductions.

To reconcile a part payment:

On the bank reconciliation screen, next to the bank statement line you want to reconcile, click Find & Match.


Find and select the checkbox next to the invoice, bill or expense claim that you want to match with the bank statement line.

Click the Split link that appears next to the payment amount.


Click Split to confirm.


Click Reconcile

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Previous Tips

May 2017 – Inventory Items In Xero

April 2017 – Xero’s Inbuilt Calculator

March 2017 – Expense Claims In Xero

February 2017 – Customise The Dashboard In Xero

January 2017 – Customisable New Reports In Xero

December 2016 – Email Templates In Xero

November 2016 – Bank Rules In Xero

October 2016 – Smart Lists In Xero

September 2016 – Files in Xero

August 2016 – Direct Bank Feeds In Xero

July 2016 – Managing Bills and Purchases in Xero

June 2016 – Shortcuts In Xero

May 2016 – Email Integration

April 2016 – Recurring Sales Invoices

March 2016 – Two Step Authentication

February 2016 – Xero Search

January 2016 – File Storage in Xero

December 2015 – Invoice Reminders

November 2015 – Xero on the go, with Xero Touch

October 2015 – Invoice Payment Terms

September 2015 – Sales Invoice Customisation

August 2015 – Business Performance Review

July 2015 – Cash Coding In Xero

June 2015 – Xero to Xero Billing

May 2015 – Find and Recode

April 2015 – Online Invoicing