Xero for Not-for-Profits: The Chart of Accounts and Setup Decisions That Matter

Xero is the most popular accounting software for Australian charities. It's cloud-based, affordable, and powerful. But many charities set it up poorly—with a chart of accounts that doesn't match their needs, tracking categories that don't work, and settings that create problems later.

This guide walks you through setting up Xero for your charity, with a focus on decisions that matter.

Quick Summary

• **Chart of accounts** is the backbone of your financial system. Get it wrong, and reporting is hard
• **Tracking categories** let you track income and expenses by program, funder, or cost centre
• **NFP-specific setup**: Separate restricted and unrestricted funds, track grants properly, manage reserves
• **Common mistakes**: Too many accounts, too few tracking categories, not separating restricted funds
• **Best practice**: Start simple, add complexity only as needed

Why Setup Matters

Xero is flexible. You can set it up many ways. But some ways are better than others.

A poorly set up Xero system means:

• Reporting is hard (you can't easily see program costs or funder performance)
• Reconciliation is painful (accounts don't match your bank or grant records)
• Compliance is risky (you can't easily extract data for ACNC or ATO)
• Decision-making is slow (you can't quickly answer "how much did we spend on program X?")

A well-set up system means:

• Reporting is easy (you can generate reports in minutes)
• Reconciliation is smooth (accounts match your bank and records)
• Compliance is straightforward (you can extract data quickly)
• Decision-making is fast (you can answer questions in real time)

The Chart of Accounts

The chart of accounts is your list of accounts. Every transaction is recorded to an account. Accounts are grouped into five categories: assets, liabilities, equity, revenue, and expenses.

Asset Accounts

Assets are things your charity owns: cash, investments, equipment, property.

Typical NFP asset accounts:

• Bank Account (operating)
• Bank Account (grants)
• Bank Account (reserves)
• Petty Cash
• Investments
• Accounts Receivable (money owed to you)
• Fixed Assets (property, equipment)
• Accumulated Depreciation

Why separate bank accounts? Many charities have multiple bank accounts: one for operating funds, one for grants, one for reserves. In Xero, create a separate account for each. This makes it easy to track cash by purpose.

Liability Accounts

Liabilities are things your charity owes: loans, payables, deferred revenue.

Typical NFP liability accounts:

• Accounts Payable (money you owe suppliers)
• Payroll Liabilities (superannuation, tax withheld)
• Deferred Revenue (money received for services not yet delivered)
• Grants Received in Advance (grants received but not yet spent)
• Loans

Why "Grants Received in Advance"? Many charities receive grants before they spend them. This creates a liability (you owe the funder the service or outcome). Track this separately so you know how much grant money is unspent.

Equity Accounts

Equity is the difference between assets and liabilities: your reserves and retained earnings.

Typical NFP equity accounts:

• Retained Earnings (accumulated surplus from prior years)
• Reserves (designated funds set aside for specific purposes)
• Current Year Surplus/Deficit

Why separate reserves? Many charities have designated reserves (e.g., building fund, equipment fund). Create a separate equity account for each. This makes it easy to track whether you're meeting your reserves targets.

Revenue Accounts

Revenue is money coming in: grants, donations, fees, other income.

Typical NFP revenue accounts:

• Government Grants
• Foundation Grants
• Donations
• Program Fees
• Membership Fees
• Fundraising Revenue
• Other Income

Why separate by source? Different revenue sources have different characteristics. Government grants are stable but bureaucratic. Donations are variable but flexible. Fees are predictable. Separating them helps you understand your revenue mix and plan accordingly.

Expense Accounts

Expenses are money going out: salaries, programs, administration, facilities.

Typical NFP expense accounts:

• Salaries and Wages
• Superannuation
• Payroll Tax
• Program Costs
• Administration Costs
• Facilities and Utilities
• Professional Fees
• Depreciation

Why group expenses? Most charities have 5–10 major expense categories. Don't create 50 accounts. Group related expenses (e.g., all staff costs under "Salaries and Wages"). Use tracking categories (see below) to break down further.

Tracking Categories

Tracking categories let you tag transactions with additional information. They're powerful for reporting.

Common tracking categories for NFPs:

1. Program or Service

Tag each expense with the program it relates to (e.g., Youth Program, Aged Care, Education).

Why? You can easily see how much you spent on each program. This is essential for grant reporting and strategic planning.

Example: A salary expense for a youth worker is tagged "Youth Program." When you run a report, you can see total youth program costs (salary + program supplies + facilities allocation).

2. Funder

Tag each expense with the funder that funded it (e.g., Government Grant, Foundation A, Unrestricted Funds).

Why? You can easily see how much you spent from each grant. This is essential for grant acquittals.

Example: A salary expense funded by a government grant is tagged "Government Grant." When you run a report, you can see total government grant spending.

3. Cost Centre

Tag each expense with the cost centre it relates to (e.g., Head Office, Branch A, Branch B).

Why? You can easily see costs by location or department.

Example: A utilities expense is tagged "Head Office." When you run a report, you can see total head office costs.

4. Project

Tag each expense with the project it relates to (e.g., Building Renovation, Technology Upgrade).

Why? You can easily see project costs and track whether you're on budget.

Example: A contractor invoice is tagged "Building Renovation." When you run a report, you can see total renovation costs.

NFP-Specific Setup Decisions

1. Restricted vs. Unrestricted Funds

Many charities receive restricted funds (money that must be spent on a specific purpose). Set up your chart of accounts to separate restricted and unrestricted funds.

Option 1: Separate Bank Accounts

• Bank Account (Unrestricted)
• Bank Account (Restricted - Government Grant)
• Bank Account (Restricted - Foundation Grant)

This is the clearest approach but requires multiple bank accounts.

Option 2: Tracking Categories

• Use one bank account but tag transactions with "Restricted" or "Unrestricted"
• Use a second tracking category to identify the specific restriction (e.g., "Government Grant," "Foundation Grant")

This works if you have fewer restricted funds.

Why it matters? Your financial statements need to show restricted and unrestricted funds separately. The ACNC and ATO want to see this distinction.

2. Grants Tracking

Set up your chart of accounts to track grants properly.

Create accounts for:

• Grants Received (revenue account)
• Grants Received in Advance (liability account - money received but not yet spent)
• Grant Expenses (expense accounts by grant or program)

Use tracking categories to:

• Tag each grant with a unique identifier (e.g., "Grant 2026-001")
• Tag each expense with the grant it's funded by

Why it matters? You need to know how much of each grant you've spent. This is essential for cash flow planning and grant acquittals.

3. Reserves Tracking

Set up your chart of accounts to track reserves.

Create accounts for:

• Reserves (equity account)
• Designated Reserves - Building Fund (equity account)
• Designated Reserves - Equipment Fund (equity account)

Why it matters? Your board needs to know whether you're meeting your reserves targets. Separate accounts make this easy to see.

4. Depreciation

Set up depreciation for fixed assets (property, equipment).

Create accounts for:

• Fixed Assets (asset account)
• Accumulated Depreciation (asset account - negative)
• Depreciation Expense (expense account)

Why it matters? Your financial statements need to show the true cost of assets. Depreciation spreads the cost over the asset's useful life.

Common Setup Mistakes

Mistake 1: Too Many Accounts

Creating 100+ accounts makes the chart of accounts unwieldy. You can't find accounts. Reporting is confusing.

How to avoid it: Start with 30–50 accounts. Group related items. Use tracking categories for detail.

Mistake 2: Not Using Tracking Categories

Creating separate accounts for every detail instead of using tracking categories.

Example: Creating "Youth Program Salaries," "Youth Program Supplies," "Aged Care Salaries," "Aged Care Supplies" instead of using "Salaries," "Supplies" with a "Program" tracking category.

How to avoid it: Use tracking categories for program, funder, cost centre, and project. This keeps your chart of accounts clean.

Mistake 3: Not Separating Restricted Funds

Mixing restricted and unrestricted funds in the same accounts.

How to avoid it: Create separate accounts or use tracking categories to distinguish restricted and unrestricted funds.

Mistake 4: Not Tracking Grants Properly

Not setting up a system to track which expenses are funded by which grants.

How to avoid it: Create a "Grant" tracking category. Tag each expense with the grant that funded it.

Mistake 5: Not Setting Up Depreciation

Treating all equipment purchases as expenses instead of capitalising and depreciating them.

How to avoid it: Create fixed asset accounts. Depreciate over the asset's useful life.

Setting Up Xero: Step-by-Step

Step 1: Create Your Chart of Accounts

In Xero, go to Settings > Chart of Accounts. Create accounts for:

• Assets (bank accounts, receivables, fixed assets)
• Liabilities (payables, deferred revenue, loans)
• Equity (retained earnings, reserves)
• Revenue (grants, donations, fees)
• Expenses (salaries, programs, administration)

Step 2: Set Up Tracking Categories

In Xero, go to Settings > Tracking Categories. Create categories for:

• Program or Service
• Funder
• Cost Centre
• Project

Step 3: Configure Settings

• Enable multi-currency if needed
• Set up tax rates (GST, PAYG withholding)
• Configure bank feeds (automatic transaction import)
• Set up users and permissions

Step 4: Import Historical Data

If you're migrating from another system, import your opening balances and historical transactions.

Step 5: Test and Refine

Before going live, test your setup:

• Record sample transactions
• Generate reports
• Reconcile to your bank account
• Refine as needed

Step 6: Train Your Team

Ensure your finance team knows how to:

• Record transactions correctly
• Use tracking categories
• Generate reports
• Reconcile accounts

Frequently Asked Questions

Q: Should we use Xero's NFP template? A: Xero has a template for charities. It's a good starting point, but you'll likely need to customise it for your specific needs.

Q: How many tracking categories should we have? A: 3–5 is typical. Too many makes it hard to tag transactions consistently. Too few limits reporting flexibility.

Q: Can we change our chart of accounts after we start using Xero? A: Yes, but it's disruptive. Historical reports will be affected. Set it up right the first time.

Q: Should we use Xero's payroll feature? A: If you have employees, yes. It integrates with your accounting and makes payroll tax reporting easier.

Q: How do we ensure data quality? A: Regular reconciliation (monthly), clear tagging guidelines, and periodic audits of transactions.

The Bottom Line

Xero is a powerful tool for charities. But it's only as good as your setup. Spend time getting your chart of accounts and tracking categories right. It will pay dividends in reporting, compliance, and decision-making.

Book a Free 30-Minute Board Briefing to discuss your Xero setup and accounting system. Book now →

References

[1] Xero. (2026). Accounting for Not-for-Profits. https://www.xero.com/au/ [2] Australian Charities and Not-for-profits Commission. (2026). Financial Reporting for Charities. https://www.acnc.gov.au/