Xero – Difference Between Liability and Revenue

When setting up Xero there are three different types of accounts to connect; Sales/Revenue, Asset and Liability.

What the Accounts Mean.

The Asset records the total amount taken from your business at any given time.

Revenue is similar to assets but is without any value that has not been spent at the business. This does also mean that TAX affects this account.

The remaining that has been taken by your business but not used yet to pay for a service or product is the Liability, this includes vouchers and credits.

Why is this important.

We will use an example:

Sarah would like to book a service for the future and to pay a deposit towards it.

The total of the service comes to $150 and she would like to put a $75 deposit on it.

After completing your End of Day, it will tell Client Diary to pass on the $75 to your Asset Account and the amount will be recorded in your Liability Account.

This amount while being held by your business, hasn’t been spent yet and is for the moment TAX free.

When the client comes back into the business for the service she now pays the remaining $75 and uses her $75 deposit.

Now after completing End of Day, the $75 from today’s sale is entered into the Asset Account for a total of $150, while the Revenue Account receives the $150 minus TAX.

How does this work in your business.

While an amount is sitting in the Liability account it will not have TAX put against it until is has been used with a service that has been listed as the business pays tax for this service.

Taking in different amounts of client deposits or credits, you will need to know what has been taken as a deposit and what has been used on a sale.

With recording the taken Revenue, it is now known what has been used by the client and what is still waiting to be used in the Liability account.