Your chart of accounts is the foundation of every financial report your business produces. A well-structured chart means clear, actionable reports. A messy one means confusion, bad decisions, and painful BAS lodgments. Here's how to set it up properly in Xero for Australian SMEs.
1. What Is a Chart of Accounts?
It's the list of all accounts in your accounting system, organised into five categories:
| Category | Examples | Report |
|---|---|---|
| Assets | Bank accounts, receivables, equipment, vehicles | Balance Sheet |
| Liabilities | Credit cards, loans, GST payable, super payable | Balance Sheet |
| Equity | Owner's equity, retained earnings, drawings | Balance Sheet |
| Revenue | Sales, service income, interest income | P&L |
| Expenses | Wages, rent, insurance, materials, marketing | P&L |
2. Xero's Default Chart — Keep It or Customise?
Xero provides a default chart of accounts when you create a new organisation. It's a reasonable starting point, but you should customise it:
- Delete accounts you don't use — fewer accounts = cleaner reports. If you don't sell physical products, remove "Cost of Goods Sold" and inventory accounts.
- Add industry-specific accounts — a tradie needs "Materials" and "Subcontractor Costs"; a café needs "Food Costs" and "Beverage Costs."
- Separate revenue streams — if you earn from multiple services, create an account for each (e.g., "Consulting Revenue," "Training Revenue," "Product Sales").
- Keep expenses granular enough to be useful but not so detailed that you have 100 accounts. Aim for 15–30 expense accounts.
3. Essential Accounts for Australian SMEs
Revenue:
- Sales / Service Revenue (separate by type if needed)
- Interest Income
- Other Income (e.g., government grants, rebates)
Cost of Sales:
- Materials / Stock Purchases
- Subcontractor Costs
- Direct Labour (if applicable)
Operating Expenses:
- Wages & Salaries
- Superannuation
- Rent
- Insurance
- Motor Vehicle Expenses
- Office Supplies
- Software & Subscriptions
- Marketing & Advertising
- Professional Fees (accounting, legal)
- Bank Fees & Charges
- Depreciation
- Training & Development
4. Common Mistakes
- Too many accounts: "Officeworks Purchases," "Amazon Purchases," and "Bunnings Purchases" should all be "Office Supplies" or "Materials." Categorise by type of expense, not by supplier.
- Wrong tax codes: Ensure each account has the correct default GST treatment. Revenue accounts should default to "GST on Income"; most expense accounts to "GST on Expenses"; bank fees to "No GST."
- Not using tracking categories: Instead of creating separate revenue accounts for each location or department, use Xero's Tracking Categories. This keeps your chart clean while still allowing detailed analysis.
5. Annual Review
Review your chart of accounts at least once a year (EOFY is ideal). Archive unused accounts, add new ones for new activities, and ensure the structure still matches your business.
Key Takeaways
- Customise Xero's default chart — delete unused accounts and add industry-specific ones.
- Aim for 15–30 expense accounts — enough detail to be useful, not so many it's confusing.
- Categorise by expense type, not by supplier name.
- Set correct default GST codes on every account.
- Use Tracking Categories for locations or departments instead of duplicating accounts.