How to Reconcile in Xero

Reconciliation is a core part of bookkeeping, and in Xero, it is designed to be simple, fast and accurate. Reconciling means matching your bank transactions with the entries in your accounting records. This ensures that what appears on your bank statement is reflected correctly in your accounts, helping you maintain accurate financial information and comply with HMRC requirements.

Xero's bank reconciliation process uses live bank feeds, smart suggestions and an intuitive layout that allows you to reconcile daily with minimal effort. This article explains how to reconcile transactions in Xero, what to watch out for and how to correct errors if things do not match.

What is reconciliation in Xero?

In accounting terms, reconciliation means ensuring that the transactions in your bank account match the records in your accounts system. In Xero, this process involves reviewing each bank transaction that has come through your bank feed and matching it with an invoice, bill, expense claim or bank rule in Xero.

Xero displays imported bank transactions on one side of the screen and your accounting records on the other. If Xero finds a match, it will suggest it automatically. If not, you can manually create or link the transaction.

Setting up for reconciliation

Before you start, ensure that your bank feed is active and working properly. Xero supports direct feeds from most UK banks, which import transactions automatically each day. If your bank is not supported, you can upload statements manually.

It is also important to regularly create and approve invoices, bills and bank transfers in Xero so the system has accurate records to match against your bank transactions.

Step-by-step: How to reconcile in Xero

Start by navigating to the “Bank accounts” section from the Xero dashboard. You will see a list of your connected bank accounts, along with the number of unreconciled items.

Click on the account you want to reconcile. This will bring you to the reconciliation screen.

Each bank transaction will appear with a description, date and amount. If Xero finds a likely match with an invoice, bill or payment already in the system, it will suggest a match with a green “OK” button. If you agree with the match, click “OK” to reconcile.

If there is no suggested match, you have several options:

• Create: Manually enter a new transaction if the payment was not already recorded

• Find and match: Search through existing records and link the transaction manually

• Split: Divide the payment across multiple invoices or expense items

• Transfer: If the money was moved between accounts, mark it as a transfer

Once you complete this process, the transaction is marked as reconciled. The goal is to reach zero unreconciled transactions for the period.

Bank rules and automation

Xero allows you to set up bank rules that automatically suggest how certain transactions should be categorised. This is especially useful for recurring payments like subscriptions, rent or regular supplier costs.

For example, if you receive a monthly payment from a client that is not invoiced, you can set a bank rule to categorise it as income automatically.

While bank rules save time, it is important to review each transaction carefully to ensure accuracy. Misclassifications can lead to reporting errors and compliance issues.

How often should you reconcile?

Ideally, you should reconcile your bank accounts weekly or even daily. This makes it easier to catch errors, identify missing information and stay on top of your cash flow.

Regular reconciliation also ensures that your reports, such as profit and loss or balance sheet, reflect the actual financial position of your business. This is crucial when filing VAT returns, preparing accounts or applying for finance.

Fixing reconciliation errors

If you make a mistake or reconcile something incorrectly, you can undo it. Go to the account's “Account Transactions” tab, find the transaction, click “Remove and Redo” and reconcile it again correctly.

It is better to fix mistakes early than let them build up over time. If you’re unsure about a transaction, flag it for review or speak to your accountant or bookkeeper.

Final thoughts

Reconciling in Xero is a fast, user-friendly process that keeps your accounts accurate and up to date. With automated bank feeds, smart matching and helpful tools like bank rules, most users can keep their books tidy with just a few minutes of effort each week.

It is one of the most important habits for maintaining good financial health in your business. By staying on top of reconciliation, you gain confidence in your reports, clarity in your cash flow and peace of mind when it comes to compliance.