How to Reconcile in Xero

At Towerstone Accountants we provide specialist limited company accountancy services for directors and owner managed businesses across the UK. We created this webpage for business owners who want practical guidance on choosing and using accounting software, including day to day bookkeeping tasks, invoicing, bank feeds, and reporting. Our aim is to help you keep accurate records, reduce admin time, and stay compliant with HMRC and Companies House requirements.

Reconciling in Xero is one of the most important habits you can build if you want accurate accounts reliable reports and fewer problems at year end. I work with a lot of business owners who use Xero every day but still feel unsure about reconciliation. They click buttons until the balance goes to zero without really understanding what they are doing which is where mistakes creep in.

In this guide I am going to explain how to reconcile in Xero properly step by step. I will also explain what reconciliation actually means why it matters how it affects VAT and what to do when things do not match. I am writing this in the first person based on how I train my own UK clients to use Xero confidently and in line with HMRC expectations.

What reconciliation actually means

Reconciliation is the process of matching transactions in your bank feed to transactions in your accounting records.

In simple terms you are checking that:

• Every payment into the bank is recorded as income or something else appropriate

• Every payment out of the bank is recorded as an expense transfer or payment

• The balance in Xero reflects what actually happened in the bank

You are not changing your bank statement. You are explaining it to Xero.

Why reconciliation matters so much

Reconciliation is not just a bookkeeping task. It underpins everything else.

If reconciliation is done properly:

• Your profit figure is reliable

• Your VAT return is correct

• Your customer and supplier balances make sense

• Your accountant can trust your data

• HMRC queries are far easier to deal with

If reconciliation is done badly or not at all everything built on top of it is unreliable.

How often you should reconcile in Xero

In my experience little and often is best.

Most businesses should reconcile:

• At least weekly

• Ideally every few days if transaction volume is high

Leaving reconciliation until the end of the month or worse the end of the year makes errors harder to spot and harder to fix.

Before you start reconciling

Before you click Reconcile there are a few checks worth doing.

Make sure that:

• Your bank feed is connected and up to date

• All bank accounts used by the business are in Xero

• You are logged into the correct organisation

• You understand what the transaction actually is

Never reconcile something you do not recognise. If in doubt pause and investigate.

Step by step how to reconcile in Xero

I will now walk through the standard process exactly as I explain it to clients.

Step one go to the bank accounts screen

From the Xero dashboard:

• Click Accounting

• Select Bank accounts

You will see a list of all bank accounts connected to Xero and the number of unreconciled transactions for each one.

Step two click Reconcile

Choose the bank account you want to work on and click Reconcile.

This opens the reconciliation screen showing bank statement lines on one side and suggested matches on the other.

Step three review each bank transaction

Xero will show you one bank transaction at a time.

For each transaction you need to decide:

• What is this payment

• Has it already been recorded in Xero

• Does Xero’s suggestion look correct

Never assume Xero is right. It is clever but it only works with the information it has.

Matching an existing transaction

Often Xero will find a match automatically.

This usually happens when:

• You raised a sales invoice and the customer paid it

• You entered a bill and paid it

• The amount and date line up

If the match is correct:

• Check the details

• Click OK

This links the bank transaction to the existing record.

Creating a new transaction during reconciliation

If there is no match you will need to create one.

This is common for:

• Card payments

• Direct debits

• Bank charges

• Small purchases

You will see options such as:

• Spend money

• Receive money

• Transfer

• Find match

Choose the option that reflects what actually happened.

Coding a spend money transaction

For a payment out of the bank:

• Choose Spend money

• Select the correct expense account

• Check the VAT rate

• Add a clear description

• Click OK

The account and VAT rate matter because they affect your profit and VAT return.

Coding a receive money transaction

For money coming into the bank that is not linked to an invoice:

• Choose Receive money

• Select the correct income account

• Check the VAT rate

• Add a description

• Click OK

This is common for things like interest refunds or owner contributions.

Using Find match properly

Find match is used when the transaction already exists in Xero but Xero has not automatically linked it.

This often happens when:

• Amounts differ slightly

• Multiple invoices are paid together

• Dates do not line up exactly

Use Find match to manually link the bank transaction to one or more existing records.

Reconciling multiple items to one payment

Sometimes one bank payment relates to several invoices or bills.

For example:

• A customer pays two invoices in one transfer

• You pay several supplier bills together

In this case:

• Use Find match

• Tick all relevant items

• Make sure the total matches the bank line

• Click OK

This keeps customer and supplier balances accurate.

Handling bank fees and small differences

Bank charges often appear as small unmatched amounts.

For these:

• Code them to a bank charges or fees account

• Use the correct VAT treatment which is often no VAT

• Add a clear description

Do not force them into another transaction just to make the screen clear.

Reconciling transfers between accounts

If money moves between two bank accounts both in Xero:

• Use the Transfer option

• Select the other bank account

• Reconcile both sides

This avoids double counting income or expenses.

What to do when the amounts do not match

This is where many people go wrong.

If the amount in Xero does not match the bank:

• Do not guess

• Do not force it to reconcile

• Investigate first

Common causes include:

• VAT coded incorrectly

• Duplicate entries

• Partial payments

• Fees deducted at source

• Foreign currency differences

Fix the underlying issue before reconciling.

Reconciliation and VAT accuracy

Reconciliation has a direct impact on VAT.

If you reconcile something with the wrong VAT rate:

• Your VAT return will be wrong

• You may overpay or underpay HMRC

• Corrections become more complex later

Always check VAT during reconciliation especially for expenses.

Reconciling PayPal Stripe and other feeds

Payment processors often need extra care.

Common issues include:

• Gross payments versus net receipts

• Fees deducted before money hits the bank

• Multiple transactions rolled into one payout

The correct approach is usually:

• Record gross income

• Record fees separately

• Reconcile the net payout

This keeps income and fees visible and VAT accurate.

Reconciling director loan transactions

Director loan movements must be handled carefully.

When a director:

• Puts money into the business

• Takes money out personally

These should be coded to the director loan account not income or expenses.

Getting this wrong causes tax and balance sheet problems later.

What reconciliation does not do

This is important to understand.

Reconciliation:

• Does not decide whether something is allowable

• Does not replace review or judgement

• Does not fix incorrect setup

It simply records what happened in the bank.

The quality of reconciliation depends on the decisions you make while doing it.

Reviewing reconciled transactions

Once reconciled transactions move out of the main screen but they are not locked away.

You can:

• Click on the transaction

• View the audit trail

• Edit details if needed

However changing reconciled transactions should be done carefully especially if VAT returns have been filed.

Reconciling regularly versus catching up

Catching up months of reconciliation is stressful and error prone.

Regular reconciliation:

• Makes errors obvious

• Keeps balances tidy

• Saves time overall

• Makes year end far easier

I always recommend treating reconciliation as part of normal weekly admin not a special task.

Common reconciliation mistakes I see

There are a few patterns that come up repeatedly.

These include:

• Reconciling transactions you do not understand

• Using the wrong VAT rate just to clear the screen

• Coding everything to one expense account

• Not reconciling all bank accounts

• Ignoring unreconciled items for months

Each of these leads to bigger problems later.

Reconciling before month end or VAT returns

Before you run reports submit VAT returns or send data to your accountant you should always:

• Fully reconcile all bank accounts

• Clear old unreconciled items

• Review unusual transactions

This ensures reports reflect reality.

What to do if your bank balance does not agree

If Xero and the bank do not agree after reconciliation:

• Check for missing days in the bank feed

• Check for duplicate entries

• Check opening balances

• Review unreconciled items

• Review transfers and loan accounts

Differences always have a cause even if it is not obvious at first.

How an accountant expects reconciliation to look

From an accountant’s perspective good reconciliation means:

• All bank transactions are reconciled

• Coding is sensible and consistent

• VAT is applied correctly

• Director loans are clear

• There are no suspense balances

When reconciliation is done well year end work is quicker cheaper and far less stressful.

Using bank rules to speed things up

Xero bank rules can help automate reconciliation.

They are useful for:

• Regular expenses

• Subscription payments

• Bank fees

However rules should be reviewed periodically. Blind automation can repeat mistakes quickly.

Reconciliation and audit trail

One of the strengths of Xero is the audit trail.

Every reconciliation shows:

• Who reconciled it

• When it was reconciled

• What changes were made

This is valuable for HMRC enquiries and internal review.

Training yourself to reconcile confidently

Reconciliation confidence comes from understanding not from speed.

Good habits include:

• Reading each transaction

• Asking what it actually represents

• Checking VAT every time

• Adding clear descriptions

• Stopping when something does not make sense

Speed comes naturally once understanding is there.

How I help clients with Xero reconciliation

When I support clients with Xero I focus on building understanding rather than doing it for them.

I help by:

• Explaining what each transaction represents

• Setting up accounts and VAT properly

• Creating sensible bank rules

• Reviewing reconciliations regularly

• Fixing patterns rather than one off errors

This approach saves time and reduces long term costs.

Final thoughts

Reconciling in Xero is not about clearing a screen or chasing a green tick. It is about telling the financial story of your business accurately. Every click during reconciliation is a decision and those decisions feed into your profit tax and compliance.

In my experience once business owners understand what reconciliation really does and slow down enough to do it properly their confidence increases and the rest of their accounting becomes far easier. Done well reconciliation turns Xero from a chore into a genuinely useful tool for running your business.

You may also find our guidance on what is xero and how to connect tide to xero helpful when exploring related accounting software tasks. For a broader overview of software options and setup guidance, you can visit our accounting software hub.