You've Got Xero, But You're Not Sure It's Set Up Right

There’s a specific kind of unease that comes with using accounting software you didn’t set up. The invoices go out, the bank feed comes in, the reports produce numbers. Nothing is visibly broken. But you couldn’t say with any confidence that the numbers are right, and when your accountant asks a question about them you find yourself hedging.

That instinct is usually worth listening to. Xero is very good at looking finished. A file can be tidy, current, fully reconciled and still be producing figures that don’t describe your business, because reconciliation only proves that the amounts match the bank, not that they’ve been recorded as the right thing.

Here’s what we look at, roughly in this order, when we open a file for the first time.

1. Does the bank balance actually match?

The first and cheapest test. Open your bank’s app and open Xero, and compare the balance of the same account on the same day.

If they differ, the reconciliation report will tell you why, and it’s almost always one of four things: transactions imported but never reconciled; duplicates created by a re-imported feed or an overlapping manual import; manual journals posted straight to the bank account; or a feed that quietly stopped importing weeks ago and nobody noticed.

That last one is more common than it should be. Bank feeds break (a password change, a re-issued card, an expired authorisation) and Xero doesn’t make a fuss about it. Everything looks normal, there just aren’t any new transactions. If you have several accounts and only look closely at one, a broken feed on a secondary account can go unnoticed for months.

2. Does the chart of accounts describe your business?

Most files run on something close to the default chart of accounts, occasionally with a few additions bolted on. That’s the difference between reports that are technically correct and reports you’d actually make a decision from.

The question to ask is whether your profit and loss lets you answer the questions you actually have. If you run two distinct service lines, can you see them separately? If materials are your biggest variable cost, is that its own line, or is it inside a general “cost of sales” figure alongside four unrelated things? If you’d like to know what you’re spending on subcontractors, is that visible without exporting to a spreadsheet?

The failure mode here isn’t error, it’s uselessness. A file with fourteen expense accounts, one of which is “General Expenses” holding 40% of your spending, is accurate and tells you nothing.

3. Is GST treated consistently?

This is where a file stops being a reporting inconvenience and becomes a compliance problem, because these figures flow straight into your activity statements.

Things worth checking: whether your default tax rates on each account are right; whether you’re on a cash or accruals basis for GST and whether the file is actually configured that way; whether GST-free items such as certain food, health and education supplies are coded as GST-free rather than taxable; and whether bank fees, interest and government charges are correctly treated rather than having 10% assumed on them.

The pattern we see most is inconsistency rather than a uniform error: the same type of transaction coded three different ways depending on who processed it and when. That produces activity statements that are each individually plausible and collectively impossible.

4. What’s sitting in the suspense accounts?

Every drifting file has a holding pen. It might be called Suspense, or Uncategorised, or it might be a legitimate account being used as one.

The two things to look at are how much is in there and how old the oldest item is. A small balance from the last few weeks is normal. That’s the queue of things waiting for a question to be answered. A balance that’s been growing for eighteen months means the questions stopped being asked, and every report drawn from the file since then has been missing that money.

The related check is whether personal and business spending are properly separated, and whether owner drawings are recorded as drawings rather than buried in expenses. This one has tax consequences as well as reporting ones, and it’s very common in businesses that started out with a single bank account.

5. Are the ageing reports real?

Your accounts receivable ageing report should be a list of money you’re actually going to collect. Frequently it isn’t.

What accumulates instead: invoices paid by a method that was never matched off, so they still show as outstanding; duplicated invoices; credit notes never allocated; and genuinely dead debt from years ago that nobody has written off because writing it off feels like giving up.

The consequence is that the one report you’d use to chase money becomes something you stop trusting, and once you stop trusting it you stop chasing. If your receivables list has anything on it older than a year, it’s worth going through line by line once. Painful, but it usually turns up real collectable money mixed in with the ghosts. Ongoing, that’s what accounts receivable management is for.

The same applies in reverse to payables, where the risk is less about lost money and more about an inaccurate picture of what you owe.

6. Is payroll reporting on the current basis?

If you have employees, this is the most time-sensitive item on the list, because the rules changed on 1 July 2026 and a lot of files haven’t caught up.

Under Payday Super, super guarantee has to be paid each payday rather than quarterly, and it must be received by the employee’s fund within seven business days of the pay date. It’s calculated on qualifying earnings, which is a broader base than the ordinary time earnings figure files were previously configured around. And Single Touch Payroll reports now have to carry year-to-date qualifying earnings and super liability for each employee, every payday.

Beyond that, check that pay items are mapped correctly for super and leave accrual, that leave balances are right, that the correct award classification is behind each employee’s rate, and that terminated employees have actually been finalised.

There’s more detail on what changed in our piece on setting up payroll, which covers the Payday Super transition in full.

7. Which bank rules are running, and are they still right?

Bank rules are the most under-examined part of most files, and the most capable of doing damage quietly.

A rule is created for a good reason: this supplier is always this expense account with this tax rate. Then something changes. The supplier starts invoicing for something different. A GST-free product becomes taxable. A single payment becomes a mix of two things. The rule doesn’t know, and it keeps applying: correctly formatted, automatically reconciled, silently wrong, potentially hundreds of times.

Automated coding is genuinely valuable, and we set rules up deliberately. The point is that they need reviewing on a schedule rather than being treated as settled.

8. Do the opening balances agree with your accountant?

The last check is the one almost nobody performs, and it invalidates more analysis than any other item here.

For each closed financial year, the balances in Xero should agree with the financial statements your accountant prepared and lodged. Often they don’t, because year-end adjusting journals were prepared in the accountant’s own software, used for the tax return, and never entered back into Xero.

When that happens, your file and your lodged position diverge, and the gap compounds each year it isn’t reconciled. Every comparative figure, every year-on-year trend, every “are we doing better than last year” question is then being answered from the wrong baseline. It’s also the first thing that makes the following year’s tax work more expensive than it needed to be, which is where end of financial year reporting earns its keep.

Fix it or start again?

Fix it, in almost every case. A new file means abandoning your history and your comparatives, which is a real and permanent loss, and the same underlying issues tend to reappear if the reason for them hasn’t been addressed.

Starting fresh is genuinely warranted only where something structural is wrong: the file is under the wrong entity, the conversion date was set incorrectly, or the business restructured and the file never followed. Those are foundation problems rather than data problems.

Everything else on this list is correctable in place. Most of it is a matter of days rather than weeks, and the corrections are permanent rather than something you’ll be redoing next quarter.

Getting it looked at

We offer a free Xero file health check, which is exactly the eight things above run over your file, with a plain-language summary of what we found and what actually needs doing. There’s no obligation attached to it, and a reasonable number of them come back saying the file is basically fine and here are three small things to tidy.

If it turns out the file needs more than tidying, Xero setup and training covers rebuilding the structure properly, and catch-ups and clean-ups covers the historical data. As a Xero Platinum Partner we spend a lot of time in other people’s files, which mostly means we’ve seen your particular problem before.

The Lady Abacus takeaway

The thing worth understanding about Xero is that it’s very good at the mechanical part and completely indifferent to the judgement part. It will reconcile a transaction to the wrong account as cheerfully as the right one, apply a stale bank rule several hundred times without comment, and generate a beautifully formatted report from data that describes nothing.

Which is why “my Xero is up to date” and “my numbers are reliable” are two different claims. The first is about whether the work has been done. The second is about whether it was the right work, and that’s a question the software can’t answer for you.