One of my favorite things about Xero, an online accounting software, is its ability to automatically categorize transactions based on a customized set of rules. While other accounting software have some built-in automation features (such as pre-filling information from the last entered transaction for a payee), Xero is unique in that it categorizes transactions when they match certain conditions for payees, amounts, references, etc.
While this automation can save a lot of time classifying transactions, it could also result in misclassifications if bank rules are applied carelessly. For example, if both office supplies and fixed assets are purchased from a payee, additional conditions may be required in the bank rules so that transactions are classified correctly. In the screenshot below, I created a bank rule so that amounts less than $500 spent at Best Buy are classified as office supplies expense (I’m using this amount as an example – consult your tax advisor to determine if a transaction should be expensed or capitalized).
On the reconcile screen, Xero prompts me to apply the rule for the amounts less than $500, but not for the $1,053.62 which may need to be categorized as a fixed asset. That transaction is left open, forcing me to investigate it further and properly classify it.