How to categorise transactions correctly
A guide to how to assign the correct category to transactions in Xero
Each transaction in Xero must be assigned to an account (expense category) and a VAT code. Getting these right ensures your Profit and Loss is accurate and your VAT return is correct.
The account code
The account code describes what the transaction is: advertising, travel, office supplies, software subscriptions, and so on. Xero has a pre-set chart of accounts. Select the category that best describes the cost. If you are unsure where the cost belongs, contact us rather than guessing.
The VAT code
Most UK business costs carry 20% VAT (use Tax on Purchases at 20%). Zero-rated costs (train fares, postage) use Zero Rated. Costs from suppliers not registered for VAT use No VAT. Costs from overseas software providers (Google, Microsoft, LinkedIn) need a reverse charge code, which we configure during setup.
💡 Important: Never use the No VAT code on a cost that carries 20% VAT just to avoid the VAT calculation. Incorrect codes distort your VAT return and may result in under-declaring output VAT or overclaiming input VAT.
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