Xero Chart of Accounts Basics

Open the profit and loss of a business that has run Xero unaided for a few years and the pattern is predictable: a general expenses account doing far too much work, several near-identical accounts splitting the same costs, and wages sitting on a code that quietly inflates the GST claim. Almost all of it traces back to the chart of accounts.

What the chart of accounts actually is

The chart of accounts is the list of categories that every transaction in Xero lands in. Every invoice line, bill line and reconciled bank transaction is coded to an account on this list, and the profit and loss, the balance sheet and the BAS are all built directly from it. Xero ships with a default chart, but it is a starting point rather than a finished design — it suits no business perfectly.

Default tax rates do the heavy lifting

Each account carries a default tax rate, and this is where most of the damage happens. When you code a bank line to an account, Xero suggests that account's default rate, and most people accept the suggestion without looking.

The classic error is wages or superannuation set to GST on Expenses. Payroll contains no GST, so the BAS quietly claims credits that do not exist. Similar problems turn up with bank charges, the stamp duty component of insurance, and payments to suppliers who are not registered for GST. Accounts for loan repayments, owner drawings and other items that never belong on an activity statement should default to BAS Excluded.

The traps we untangle most often

• Duplicate accounts, where the same type of spending is split across near-identical names, making comparisons between periods meaningless.
• Transactions coded directly to system accounts such as GST or accounts receivable, which Xero maintains automatically and which should almost never be posted to by hand.
• A chart treated like a product catalogue, with an account for every tiny variation. Tracking categories are the better tool for that level of detail.
• Old accounts renamed and reused, which quietly rewrites history. An account with transactions against it cannot be deleted in Xero, only archived — and archiving is the right instinct anyway, because it hides the account while preserving the past.

Keeping it tidy

A chart review once a year is usually enough: archive what is unused, merge duplicates going forward by picking a winner and archiving the rest, and sense-check each default tax rate against what the account actually holds. A lean, well-named chart makes every later job — reconciling, BAS review, year-end — faster and safer.

Can I delete an account I no longer use?

Only if nothing has ever been coded to it. Otherwise Xero lets you archive it, which removes it from lists while keeping the history intact.

What tax rate should wages and super use?

Neither contains GST, so they should never sit on GST on Expenses. The right treatment depends on how your activity statement is set up, so confirm it with your adviser.

Should I add a new account for every kind of expense?

No. Keep the chart lean and use tracking categories when you want detail by location, project or division.