In this article, we look at the accounting of how GoCardless integration with Xero actually works.  We are not looking at how to set up the integration but rather how the integration works once setup.  Hence we are going to assume that the integration is already set up and working for this article.

You can find more information about the benefits of using Xero or GoCardless here.

The fastest and simplest set-up procedure 

GoCardless Integration with Xero account is as simple as it sounds on paper. It only takes several minutes to set-up the whole system, and you are good to go. Let’s have a look into it step by step: 

  1. Connecting your Xero account to GoCardless. For this, you need to create a GoCardless account, which is a simple procedure. Then you need to complete the GoCardless for Xero online registration form. Once you are done your Direct Debit account will instantaneously emerge on your Xero Dashboard. As soon as it does, you will be all set to receive payments. 
  2. Now, you have to set up your customers. You can do this either automatically or manually. Just send your customers a request to fill the online registration form so that they can pay by Direct-Debit. 
  3. You are all set for collecting payments. Now you can collect all your payments automatically on the invoice due date. The payments will come directly into Xero. The waiting for payments to arrive is gone. 
  4. Automated reconciliation of payments. Once you have the setup and customers ready and payments incoming your invoices will be reconciled. You won’t have to lift a finger to do this. GoCardless will do this on it own and notify you as soon as it is done. It will also provide you with records of the fee being paid to Xero. Without you lifting a finger, and the GoCardless fee will be recorded as a fee straight to Xero. 

Before we dig into actual double entires it is worth looking at the Direct Debit timeline of GoCardless above. 

The Direct Debit service that GoCardless offers has a very simple yet promising timeline. In the first stage, you have to set up a customer as a mandate so you can have them in the list of people, you’ll be exchanging funds with. Once customers are updated to the mandated status, the second stage comes. The second stage is as simple as the first. All you have to do is create a Xero invoice in the name of the customer. Consequently, GoCardless will automatically send the customer a three days’ notice, which will remind them of the payment’s deadline, so you won’t have to. The third step doesn’t require any effort from you. GoCardless will automatically collect payment from the customer and inform you. The income will then be deposited two days post the due date. The fee is automatically reconciled as well. 

As you can see that there are at least 5 working days between the time you request GoCardless to collect payment through DD and when you actually get the money into your account.  It is important to understand each stage as different entries are made in Xero for these stages. 

In addition to the above stages, it is also important to understand the two pricing methods that GoCardless offer, Percentage Pricing or the Volume-based pricing

This is because the double entries differ in both pricing methods and hence we are going to look at each pricing scheme separately below. 

Below we are going to look an example and walk through each stage.

Example

We are going to collect payment for a sales invoice of £100 (with and without VAT) in Xero using GoCardless.  In our example we are assuming that the Direct Debit mandate and the GoCarldess integration is already setup with Xero.

The percentage scheme

In this scheme, GoCardless charges 1% of the invoice amount for each transaction.  There are no other charges. 

Step 1:  Setting up the Mandate

This can be set up either through the GoCardless dashboard or through Xero by sending a request to your client to enter his bank details and approve a DD mandate.  We are not going to go through this as we have assumed this is already setup.

Step 2:  Create Xero Invoice

Standard double entry at this stage posted by Xero and nothing happens from GoCardless.

Double Entry without VAT Double Entry with VAT
DR  Customer Ledger      £100
CR  Sales                         £100
DR Customer Ledger   £120
CR  Sales                    £100
CR  VAT Account          £20

Step 3:  Select GoCardless to collect payment

Once an invoice is created in Xero, you get an option to collect payment via DD mandate using GoCardless. Once you tick this option, Xero sends a signal to GoCardless to collect the funds. 

GoCarldess then makes an automated entry into Xero to show that the customer has made the payment by pushing the customer debt to ‘Undeposited Funds’ account (an  Balance Sheet account which is created during initial integration phase by GoCardless). 

Double Entry without VAT Double Entry with VAT
CR  Customer Ledger      £100
DR  Undeposited funds    £100
CR Customer Ledger   £120
DR  Undeposited funds £100  

Note here that in reality the customer has actually not yet made the payment, in fact at this stage they just get a notification from GoCardless that payment will be taken from their account within 3 days.  During these 3 days, the customer can choose to cancel the payment at any time.  The email looks like;

So in short, the payment could very well not go through, in fact, you will always get a number of clients every now and then where payments will bounce or be blocked.  This is one of the fundamental weaknesses in the way GoCardless double entries work as when you look at your Debtors ledger at this stage you may be fooled to think that your debtor balance is a lot lower than it actually is. 

Step 4:  GoCardless collects payment from Customer

Where successful, GoCardless will collect the payment from your customer’s account and then hold that money in its own account for further 2 days (I don’t understand why they need to hold for further 2 days, anyway).  

At this stage, the following entries are made through a journal to reflect what has happened.

Double Entry without VAT Double Entry with VAT
CR  Undeposited funds        £100
DR  GoCardless Rec Acc    £100
CR Undeposited funds      £120
DR  GoCardless Rec Acc £100  

After this journal is made to reflect the fees being charged by GoCardless of 1%.

Double Entry without VAT Double Entry with VAT
DR  GoCardless Fees (P&L)   £1
CR  GoCardless Rec Acc        £1
DR GoCardless Fees (P&L)  £1.20
CR  GoCardless Rec Acc      £1.20  

Step 5:  GoCardless pays into your account

This is the final stage where GoCardless will the money it has collected through DD to your account net of fees charged.

Double Entry without VAT Double Entry with VAT
DR  Bank                              £99
CR  GoCardless Rec Acc     £99
DR  Bank                                      £118.8
CR  GoCardless Rec Acc               £118.20

After this stage, both the Undeposited funds and GoCardless Reconciliation account should be zero. 

Volume-based pricing

In this method, GoCardless does not charge a percentage for each amount, instead, a fixed amount is charged per transaction in addition to either £200 a month fee.  The charges are billed through monthly invoice which is to be posted as a normal purchase invoice. 

Hence the only difference here is that in Stage 4 above, the GoCardless Fees (P&L) entry does not take place.  All other entries are exactly the same.

Issues with GoCarldess Reconciliation with Xero

You should carry out GoCardless reconciliation on a regular basis.  Even though GoCardless, in theory, should work just fine, believe me it doesn’t always work.  Sometimes due to integration glitches, an entry is missed, sometimes where a payment collection is cancelled or rejected, GoCardless fails to post the correcting entry.  Hence the following should help identify issues.

So, in theory, the following should reconcile;

Login to you GoCardless dashboard (on GoCardless website) and you should see the following on Home menu.

Pending

These relate to all amounts that have been requested to be collected through DD in GoCardless but where the amount hasn’t yet been collected from your clients account by GoCardless.  Hence the total here should match the total amount in your “Undeposited Funds” account in Xero Balance sheet account.

Collected

As the name suggests, these are the amount that have been collected but are sitting with GoCardless and hence should reflect the amount in “GoCardless Reconciliation Account” in Xero Balance Sheet account.  Be-careful here as sometime you may also need to add the ‘Next Payout today’ (below) to make the balance reconcile. 

Next Payout

These are the amount that is to be paid to your account.  If these amounts have not hit your bank yet, or you have not explained these in Xero yet, then you need to add this amount to your overall reconciliation. 

Other points to consider

I strongly recommend that if you are going to appoint an accountant, then they must be fully competent with GoCardless integration with Xero. I have seen too many mess-ups where reconciling becomes a real nightmare to the extent that it becomes more economical to just write off the balances resulting in unnecessary losses. 

In Conclusion

The Xero and GoCardless integration offers a smooth and fast set up experience. The Xero and GoCardless connection requires no additional configuration. Once you are done through the simple process of setting up, assigned customers sign up, the automatic collection of payment starts and all the information regarding the transactions is sent to your Xero account and saved them. It saves hours of admin time and gives out accurate information for bookkeeping. The double-entry method used always makes sure your account stays in a solid balance. Features such as Direct Debit has made lives easier of many customers and companies and continues to do so. Integration is proven to be very efficient, as stated by the director of Xero. 

Edward Berks, EMEA Director, Fintech & Ecosystem at Xero, Xero UK, said: “The success of GoCardless’ Integration with Xero has been proved by the faster payments and cash flow improvements our UK customers have reported. More payment options mean we are levelling the playing field for small businesses, and the expansion of GoCardless to Australia shows how our app marketplace can help innovative tech companies to boost their growth across the world, improving effectiveness and efficiency for businesses everywhere.”  

If you are looking for help with your Xero GoCardless integration, then please call our Accounting office in Hounslow.