It’s easy to do isn’t it? In the rush to get everything into Xero it is so tempting to squeeze the difficult items into one or two slightly generic-sounding account lines.
‘Historical Adjustment’ is one of those account lines. One of our customers came to us with over 50% of their balance sheet residing there. With our help the customer was able to clean up the balance sheet and successfully file their accounts.
Following on from this experience, we thought we would post some advice to help other Xero users who might be facing the same issue.
So what is the Historical Adjustment problem?
Consider the balance sheet line items below while paying close attention to the ‘What it means’ column:
The above illustration is designed to show one thing: that a balance sheet can only properly describe the financial position of the company if its constituent asset and liability balances relate to some real world state of affairs.
But what in the real world does the £3,000 Historical Adjustment relate to? Who do we need to give that money to? By when? What did we get for it?
It might be helpful to imagine the situation in reverse where the £3,000 is an asset instead. Would you be able to secure a bank loan based on the existence of this asset in your Xero balance sheet, even though you would be unable to provide your bank manager with any details about it?
Not that there is anything wrong with having a Historical Adjustment account, in fact it’s pretty handy. The point is that it should only be used to hold balances temporarily (and briefly) until the correct locations for those balances are found.
How can we fix it?
1. Use the account transactions
Hopefully when you look at the transactions on the Historical Adjustment account they will include sufficient detail for you to understand what they represent.
In this case, the fix is very simple: Create a manual journal that will zero the Historical Adjustment account balance and distribute its original balance appropriately across the balance sheet. (Remember that you will need to date the journal before your year end date in order to clean up the account for your published accounts.)
2. ‘Pass the buck’ (with good reason)
If someone else made the transactions on the Historical Adjustment account, or was responsible for the conversion to Xero which produced them, then simply ask this person to send you a full explanation of the transactions and/or to re-allocate them appropriately on your behalf.
This is a great solution when it works but unfortunately it’s not guaranteed that you’ll receive a satisfactory explanation from the person in question... if indeed any explanation at all!
3. Validate your conversion to Xero
If you made the transactions on the Historical Adjustment account or if you are unable to obtain an explanation from the person who did, then the first step is for you to confirm whether or not these transactions occur on your Xero conversion date (the first live date in your Xero system).
If they do, then there are two possible scenarios to be aware of:
A manual journal has been posted into Xero for the purpose of the system conversion and it included at least one transaction on the Historical Adjustment account;
Xero may have automatically posted a transaction to the Historical Adjustment account when given an unbalanced set of transactions for Conversion balances, Opening inventory balances, or Pre-conversion balances.
In either case, you should go back to the closing balance sheet from the old accounting system and compare it to your conversion transactions in Xero.
Assuming your previous system was in order, you should be able to identify the balances that are missing from your conversion transactions and these will be the ones that make up the Historical Adjustment balance.
There will of course be a reason why you left a balance on the Historical Adjustment account when the conversion was done in the first place. Hopefully you will now have both the information and the time available to correctly complete the conversion process and eliminate this balance.
Bear in mind that the closing balance sheet from the old accounting system alone may not be enough to fully describe the company’s financial position at that date. You may well have to dig a little deeper and look at additional reports from the old system such as the aged debtors and creditors.
4. Work backwards
If the transactions on your Historical Adjustment account do not occur exclusively on your Xero conversion date or if none of the above steps enable you to zero the account’s balance then it might be time to try working backwards.
The first step here is to confirm that your current balance sheet is accurate. To do this, start by making sure that your Aged Payables and Aged Receivables reports in Xero are accurate in the sense that they correlate to the business’s real world position: For each customer or supplier, you need to confirm that the amount owed on the report is correct.
Next, make sure all bank accounts are fully reconciled and that the balances match with your actual bank accounts.
Finally, go through all the accounts on your balance sheet and make sure that you understand the nature of each balance: If you have, for example, a balance on your accrued income account then can you explain what it is?
Hopefully, verifying the accuracy of the current balance sheet will alert you to a difference that will explain your historical adjustment. You might find, for instance, that in the real world you owe a further £3,000 to your creditors and that this reminds you of the fact that you once used the Historical Adjustment account for a disputed invoice many months ago. Once you know this, the fix will most likely be a straightforward manual journal.
Alternatively, if the current balance is accurate then you should work backwards from the current date and find the first transaction on the Historical Adjustment account. In theory it will be some kind of correction that will inform you of the nature of the previous transaction on the same account. In practice, the transaction chain can be far more complex than this but the principle still applies and should ultimately lead you to the information you require.
I hope you find these tips useful. They are not going to be sufficient to fix every Historical Adjustment problem but they are a good place to start.
On a final note, if you are ready to file your accounts with Instafile but have concerns about your Historical Adjustment account balance then please do not hesitate to get in touch with us and we’ll happily take a look at it for you.