Published May 2025

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Effective bookkeeping is the backbone of any successful Australian business, ensuring compliance with Australian Taxation Office (ATO) requirements and providing insights into financial health. Xero, a cloud-based accounting software, simplifies bookkeeping for small to medium-sized businesses by offering user-friendly tools for managing transactions, GST, and Business Activity Statements (BAS).

This guide provides a detailed explanation of how to perform bookkeeping in Xero with practical examples tailored for Australian businesses. Drawing on ATO guidelines and Xero’s resources, we’ll walk you through setting up accounts, coding transactions, reconciling bank feeds, and preparing BAS.

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Why Choose Xero for Bookkeeping?

Xero is a preferred choice for Australian businesses due to its intuitive interface, automation features, and ATO compliance tools. Key benefits include:

• Automated Bank Feeds: Connects directly to Australian banks (e.g., ANZ, Commonwealth Bank) for real-time transaction imports.
• GST Compliance: Auto-calculates GST for taxable sales and purchases, simplifying BAS preparation.
• Cloud-Based Access: Access financial data anytime, anywhere, ideal for remote teams.
• Integration: Syncs with payroll, CRM, and inventory tools for streamlined operations.
• Scalability: Suits sole traders, small businesses, and growing enterprises.

“Xero reduces bookkeeping time by automating repetitive tasks,” notes Xero’s official BAS guide, making it ideal for businesses managing GST and ATO reporting.

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Step-by-Step Guide to Bookkeeping in Xero

Below, we outline the key steps for effective Xero bookkeeping, with examples to illustrate each process. These steps assume you’ve signed up for a Xero account and have basic familiarity with its dashboard.

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Step 1: Set Up Your Xero Organisation

Before bookkeeping begins, configure your Xero organisation to reflect your business structure and ATO requirements.

1. Create an Organisation:
   • Log in to Xero and select “Add a new organisation.”
   • Enter your business name, ABN, and address.
   • Choose “Australia” as the country to enable GST settings compliant with ATO rules.
2. Configure Financial Settings:
   • Go to Settings > General Settings > Financial Settings.
   • Set the GST basis (e.g., “Accruals” for most businesses or “Cash” for smaller businesses under ATO’s cash accounting threshold).
   • Confirm the GST rate as 10%, per ATO standards.
3. Set Up Chart of Accounts:
   • Navigate to Accounting > Chart of Accounts.
   • Xero provides a default chart (e.g., “Sales,” “Office Expenses”), but customise it for your industry.
   • Example: A café might add accounts like “Coffee Sales” (revenue) or “Barista Wages” (expense).
4. Connect Bank Accounts:
   • Go to Accounting > Bank Accounts > Add Bank Account.
   • Search for your bank (e.g., Westpac) and authorise secure bank feeds.
   • Example: A retail business connects its ANZ business account to import daily sales and expense transactions.

Example: Sarah, a freelance graphic designer in Sydney, sets up her Xero organisation. She enters her ABN, selects “Accruals” for GST, and adds custom accounts like “Design Services” (revenue) and “Software Subscriptions” (expense). She connects her Commonwealth Bank account for automatic transaction imports.

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Step 2: Import and Categorise Transactions

Xero’s bank feeds import transactions daily, but you must categorise them correctly for accurate GST coding and BAS reporting.

1. Access Bank Transactions:
   • Go to Accounting > Bank Accounts and select your connected account.
   • Transactions appear under the “Reconcile” tab, marked as “Unreconciled.”
2. Code Transactions:
   • For each transaction, assign an account from the Chart of Accounts and apply the correct GST code.
   • Common GST codes in Xero:
     • GST on Income: For taxable sales (10% GST).
     • GST on Expenses: For GST-inclusive purchases (claimable credits).
     • GST-Free: For exports or basic food (no GST charged, credits claimable).
     • No GST: For input-taxed sales (e.g., financial services) or personal expenses (no credits).
3. Use Bank Rules:
   • Create rules to auto-code recurring transactions.
   • Go to Bank Accounts > Manage Account > Bank Rules.
   • Example: Set a rule to code all Telstra payments as “Utilities” with “GST on Expenses.”

Example: Sarah’s bank feed shows a $550 payment to Adobe for software. She categorises it as:

• Account: Software Subscriptions.
• GST Code: GST on Expenses (Xero auto-calculates $50 GST, claimable in BAS).
• Description: “Adobe Creative Cloud – April 2025.”

She also sets a bank rule to code all Adobe payments similarly, saving time on future reconciliations.

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Step 3: Reconcile Transactions

Reconciliation ensures your Xero records match your bank statements, preventing errors in financial reports.

1. Reconcile in Xero:
   • In the Reconcile tab, match each bank feed transaction to a Xero transaction.
   • Xero suggests matches based on amount, date, or payee.
   • Click “OK” to reconcile or “Create” to code new transactions.
2. Handle Discrepancies:
   • If a transaction doesn’t match (e.g., missing invoice), investigate via bank statements or supplier records.
   • Use Xero’s “Find & Match” tool to locate related invoices or bills.

Example: Sarah reconciles a $2,200 client payment for a logo design project. Xero matches it to an invoice coded as “Design Services” with “GST on Income” ($200 GST). She clicks “OK” to reconcile. A $100 discrepancy (bank fee) is coded as “Bank Charges” with “No GST” after using “Find & Match.”

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Step 4: Manage Invoices and Bills

Xero streamlines invoicing for sales and bill payments for expenses, critical for GST tracking.

1. Create Invoices:
   • Go to Business > Invoices > New Invoice.
   • Add client details, line items, and GST code (e.g., “GST on Income” for taxable sales).
   • Example: Sarah invoices a client $3,300 for website design, including $300 GST. She codes it as “Design Services” and sends it via Xero’s email feature.
2. Enter Bills:
   • Go to Business > Bills to Pay > New Bill.
   • Enter supplier details, expense category, and GST code.
   • Example: Sarah enters a $220 bill for office stationery, coded as “Office Expenses” with “GST on Expenses” ($20 GST).
3. Track Payments:
   • Mark invoices as paid when client payments appear in bank feeds.
   • Approve and pay bills via Xero’s batch payment feature.

Example: Sarah’s client pays the $3,300 invoice. She reconciles the payment in Xero, marking the invoice as “Paid.” For the $220 stationery bill, she approves it and schedules a payment via Xero, ensuring the GST credit is tracked for BAS.

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Step 5: Prepare and Lodge BAS

Xero simplifies BAS preparation, ensuring accurate GST reporting for ATO compliance.

1. Run GST Reports:
   • Go to Accounting > Reports > GST Report.
   • Select the BAS period (e.g., quarterly) and reporting method (Simpler BAS or full reporting).
   • Xero auto-populates fields like:
     • G1 (Total Sales): All sales, including GST-free.
     • 1A (GST on Sales): GST collected (e.g., $300 from Sarah’s invoice).
     • 1B (GST on Purchases): GST credits (e.g., $20 from the stationery bill).
2. Review and Adjust:
   • Check for errors (e.g., incorrect GST codes).
   • Use Xero’s “BAS Exceptions” report to identify uncoded transactions.
3. Lodge BAS:
   • For Simpler BAS, export G1, 1A, and 1B to the ATO’s online portal.
   • For full reporting, include G2 (exports), G3 (GST-free sales), G10 (capital purchases), and G11 (non-capital purchases).
   • Alternatively, use Xero’s BAS agent to lodge directly.

Example: Sarah, on Simpler BAS, runs a GST report for Q1 2025. Xero shows:

• G1: $15,000 (total sales, including $12,000 taxable).
• 1A: $1,200 (GST on taxable sales).
• 1B: $350 (GST credits on purchases like Adobe and stationery). She exports the data to the ATO portal, lodging her BAS on time.

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Step 6: Monitor Financial Health

Xero’s reports provide insights beyond GST, aiding business decisions.

1. Profit and Loss Report:
   • Go to Accounting > Reports > Profit and Loss.
   • Track revenue (e.g., Sarah’s $15,000 sales) against expenses (e.g., $2,000 software and utilities).
2. Balance Sheet:
   • Monitor assets (e.g., bank balance) and liabilities (e.g., unpaid bills).
3. Cash Summary:
   • Analyse cash flow to plan for tax payments or investments.

Example: Sarah reviews her Profit and Loss report, noting $13,000 net profit after expenses. Her Cash Summary shows $5,000 available for a new laptop, ensuring she can claim GST credits on the purchase.

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Common Bookkeeping Scenarios in Xero

Below are practical examples of Xero bookkeeping for Australian businesses, addressing GST and ATO compliance.

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Scenario 1: Retail Business with Taxable Sales

A Melbourne café records daily sales via a POS system synced with Xero.

• Transaction: $1,100 in coffee sales (including $100 GST).
• Xero Action: Code as “Coffee Sales” with “GST on Income.” Reconcile via bank feed. Include in G1 ($1,100) and 1A ($100) for BAS.
• Tip: Set a bank rule for POS deposits to auto-code as “Coffee Sales.”

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Scenario 2: GST-Free Export Sales

A software developer in Brisbane sells a $5,000 app to a US client.

• Transaction: No GST charged (export service).
• Xero Action: Code as “Software Sales” with “GST-Free.” Include in G1 ($5,000) for Simpler BAS or G1 and G2 for full reporting. Claim credits on related purchases (e.g., cloud hosting).
• Tip: Verify the client’s overseas status via contract or correspondence.

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Scenario 3: Mixed-Use Purchases

A Perth consultant uses a $1,100 laptop for 80% business and 20% personal use.

• Transaction: Includes $100 GST.
• Xero Action: Code 80% ($880) as “Equipment” with “GST on Expenses” (claim $80 GST credit). Code 20% ($220) as “Personal Use” with “No GST.” Include $80 in 1B for BAS.
• Tip: Document apportionment calculations for ATO audits.

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Scenario 4: Overseas Purchases

A Sydney retailer imports $2,200 in clothing, paying $200 GST at the border.

• Transaction: GST paid via customs.
• Xero Action: Code as “Inventory” with “GST on Expenses.” Claim $200 credit in 1B (Simpler BAS) or G11 and 1B (full reporting).
• Tip: Retain customs documents for ATO verification.

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Tips for Effective Xero Bookkeeping

• Verify Invoices: Ensure supplier invoices include ABN and “tax invoice” wording, per ATO requirements. Check ABNs via ABR.gov.au.
• Use Automation: Leverage Xero’s bank rules and auto-suggestions to reduce manual coding.
• Engage a BAS Agent: For complex GST needs (e.g., input-taxed supplies), consult a Tax Practitioners Board (TPB)-registered agent such as Scale Suite.
• Retain Records: Store tax invoices digitally in Xero for five years, per ATO rules.
• Monitor GST Settings: Regularly review GST codes in Xero to avoid BAS errors, especially for mixed-use or overseas transactions.

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FAQs on Xero Bookkeeping

Q: Can I claim GST credits on entertainment expenses in Xero?
A: If subject to fringe benefits tax (FBT), code as “No GST” (no credit). If exempt (e.g., minor benefit under ATO thresholds), code as “GST on Expenses” and claim in 1B.

Q: How do I handle late BAS lodgement in Xero?
A: Run the GST report for the overdue period, lodge via the ATO portal, and pay penalties (per ATO 2025 rates). Xero’s BAS history tracks past submissions.

Q: What if a transaction has no GST code in Xero?
A: Use the “BAS Exceptions” report to identify uncoded transactions. Assign the correct code (e.g., “GST-Free” for exports) before lodging BAS.

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Conclusion

Xero bookkeeping empowers Australian businesses to manage finances efficiently, ensuring ATO compliance and accurate BAS reporting. By setting up your organisation, coding transactions correctly, reconciling bank feeds, and leveraging Xero’s GST tools, you can streamline bookkeeping and focus on growth. Whether you’re a freelancer, retailer, or consultant, this guide, with its detailed examples, equips you to master Xero bookkeeping. For tailored support, contact a Xero-certified advisor or BAS agent to optimise your financial processes.

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