Setting Up Your Chart of Accounts in Xero

Setting Up Your Chart of Accounts in Xero

Your chart of accounts in Xero is the framework that organises every financial transaction. Getting it right means accurate reports, easier categorisation, and smoother tax compliance. Getting it wrong means confusion, errors, and wasted time.

Accessing Your Chart of Accounts

In Xero, navigate to Accounting then Advanced then Chart of Accounts. You will see a list of all your accounts organised by type.

When you first set up Xero and select your industry, it generates a default chart of accounts. This is a good starting point, but you will almost certainly need to customise it.

Understanding Account Types in Xero

Xero uses these account types:

Revenue

Accounts for income your business earns. By default, you will have a "Sales" account, but you might want to separate different revenue streams (e.g., "Product Sales," "Service Income," "Training Revenue").

Direct Costs

Costs directly related to delivering your product or service. Also called Cost of Goods Sold (COGS). This includes materials, subcontractors, and direct labour.

Expenses (Overheads)

Operating costs that are not directly tied to production. This is usually the largest group and includes everything from rent to marketing to office supplies.

Current Assets

Things your business owns that can be converted to cash within 12 months: bank accounts, accounts receivable, inventory, prepaid expenses.

Fixed Assets

Long-term assets like equipment, vehicles, furniture, and property.

Current Liabilities

What you owe in the short term: accounts payable, GST collected, PAYG withholding, credit card balances.

Non-Current Liabilities

Long-term debts like business loans and equipment finance.

Equity

The owner's share: capital contributions, retained earnings, and drawings.

Customising for Your Business

Adding Accounts

Click "Add Account" and fill in:

• Code - A unique number (Xero suggests the next available number)
• Name - A clear, descriptive name
• Type - The account type from the list above
• Tax - Default tax rate for transactions in this account
• Description - Optional but helpful for clarity

Recommended Accounts for Australian SMBs

Here is a practical set of accounts beyond the Xero defaults:

Revenue: Sales income, service revenue, interest income, other income

Direct Costs: Materials, subcontractor costs, direct labour, freight and delivery

Expenses: Advertising and marketing, bank fees and charges, cleaning, computer and IT expenses, depreciation, dues and subscriptions, electricity and gas, entertainment, insurance (general), insurance (workers comp), interest paid, legal fees, accounting fees, motor vehicle (fuel), motor vehicle (registration and insurance), motor vehicle (repairs), office supplies, postage and courier, printing and stationery, protective clothing, rent, repairs and maintenance, small tools and equipment, staff training, superannuation, telephone and internet, travel (domestic), travel (international), wages and salaries, workers compensation

Removing Unnecessary Accounts

If an account has never been used, you can delete it. If it has been used but is no longer needed, archive it instead. Archived accounts do not show up in drop-down menus but their historical data is preserved.

Numbering Conventions

Xero automatically assigns account codes, but maintaining a logical numbering system helps with organisation:

• 200-299: Revenue
• 300-399: Direct Costs
• 400-499: Operating Expenses
• 500-599: Current Assets
• 600-699: Fixed Assets
• 700-799: Current Liabilities
• 800-899: Non-Current Liabilities
• 900-999: Equity

You can renumber accounts to fit this convention, but be aware that changing codes on accounts with existing transactions can affect some reports.

Setting Default Tax Rates

Each account in Xero has a default tax rate. Set these correctly to save time during transaction categorisation:

• Revenue accounts: GST on Income (if GST registered)
• Most expense accounts: GST on Expenses
• Bank fees, wages, super: BAS Excluded or GST Free
• Insurance: Check - some insurance includes GST, some is input-taxed
• Interest: GST Free (input taxed for financial supplies)

When the default tax rate is set correctly, you do not need to adjust it each time you categorise a transaction.

Tips for a Clean Chart of Accounts

Keep it lean - More accounts does not mean better data. If you are not going to analyse an expense category separately, it does not need its own account. Thirty to fifty accounts is typical for a small business.

Use clear names - Account names should be self-explanatory. "Motor Vehicle - Fuel" is better than "MV Fuel" or "Account 451."

Be consistent with your accountant - If your accountant has preferences about how your chart of accounts should be structured, follow their guidance. They work with your data at tax time, and a familiar structure saves them time.

Review annually - At the start of each financial year, review your chart of accounts. Remove unused accounts, add new ones for changed circumstances, and ensure the structure still suits your business.

Do not change mid-year if you can avoid it. Major restructuring is best done at the start of a new financial year to maintain clean year-over-year comparisons.

A well-structured chart of accounts is not just an organisational nicety - it directly impacts the quality of your financial reporting and the efficiency of your bookkeeping. Take the time to set it up thoughtfully, and every transaction you categorise from that point forward will be contributing to meaningful, accurate financial data.