You may see this if you use Xero's invoicing capability to send invoices to customers and/or record bills from your suppliers.
When you enter an invoice or bill, Xero will record that as income or an expense in your profit and loss account. Because it hasn't been paid yet, you'll also have a debtor or a creditor in your balance sheet.
When reconciling your bank account, you need to tell Xero that it's a payment for an invoice or bill already entered. Click on the 'Match' tab, and Xero will come up with some suggested invoices. Select the correct one and hit 'OK'.
You may find that a bank transaction doesn’t exactly match the amount on an invoice or bill. If multiple invoices may have been paid at the same time, use the ‘Find & Match’ button to select more than one invoice. Where only part of the invoice or bill has been paid, follow Xero’s instructions here to record the split payment - it’s easier than you think!
If you don't match the invoice or bill when reconciling, and instead record it as a Spend/Receive Money transaction, this will happen:
- Xero doesn't know that the invoice or bill has been paid - it remains as a debtor or creditor; and
- Xero records it as a sale or expense, so it's double-counted - once when you entered the invoice/bill, and again when recording it as Spend/Receive Money; and
- Your bank reconciliation will show Outstanding Receipts; and
- Your GST return is probably impacted