Before You Start

This guide assumes you have administrator access to a Xero organization.

Overview

20 min
Setup Time
Intermediate
Difficulty
Monthly
Review

What You’ll Learn

  • How to effectively set up Xero Tracking Categories
  • Applying categories to various transactions (invoices, bills, bank)
  • Generating segmented financial reports (P&L, Budget vs. Actuals)
  • Best practices for maintaining category data consistency

1. Understanding Xero Tracking Categories

Xero Tracking Categories allow you to classify transactions by dimensions like departments, regions, or projects. This enables highly granular financial reporting without cluttering your Chart of Accounts.

Common Uses

  • Departmental Performance (e.g., Sales, Marketing, Operations)
  • Location-based Reporting (e.g., East, West, Online)
  • Project or Job Costing (e.g., Project Alpha, Client Beta)
  • Grant or Fund Accounting

Key Benefits

  • Detailed Profit & Loss by segment
  • Enhanced Budget vs. Actuals analysis
  • Improved cost allocation and control
  • Simplified financial analysis for specific business areas

2. Setting Up Your Tracking Categories

Xero allows for two active tracking categories at any time, each with multiple options.

Category 1: Departments

Use this for internal organizational units.

Recommended Options:
  • Sales
  • Marketing
  • Operations
  • Administration
Avoid:
  • Too many granular options
  • Confusing names
  • Using for individual clients/jobs if many

Category 2: Locations

Ideal for geographical segments or business units.

Expert Tip: Plan your categories carefully before setup. Renaming categories or options later can affect historical reports. Aim for broad, meaningful categories that align with your reporting needs.

3. Step-by-Step: Configuration in Xero

Here is the high-level workflow for setting up your categories.

{
  "tracking_category_name": "Department",
  "options": [
    "Sales",
    "Marketing",
    "Operations"
  ],
  "is_active": true
}

4. Applying Tracking Categories to Transactions

  1. 1

    Bills and Invoices

    When creating a new bill or invoice, you’ll see dropdown fields for your active tracking categories. Select the appropriate option for each line item.

  2. 2

    Bank Transactions

    For transactions reconciled from the bank feed, you can assign tracking categories directly during the ‘Create’ or ‘Match’ process.

  3. 3

    Manual Journals

    When entering manual journals, ensure you select the correct tracking category for each journal line to maintain data integrity.

Common Error: Inconsistent Application

Failing to consistently apply tracking categories to all relevant transactions will lead to incomplete and inaccurate reports. Train your team and perform regular checks.

5. Reporting with Tracking Categories

Key Reports to Utilize

  • Profit & Loss by Tracking Category
  • Budget Manager (segment by category)
  • Trial Balance (filter by category)
  • Activity Statement (if applicable, filter by category)

Need Help?

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