How to Prepare for your Financial Year-End in Xero
For many small business owners, year-end has a habit of creeping up quietly. One minute you are dealing with day-to-day cash flow and customers, and the next you are being asked for reports, figures, and explanations you have not thought about in months.
If you use Xero, you are already in a strong position. But software alone does not guarantee a smooth financial year-end. What really makes the difference is how well your records are prepared before you hand over to your accountant..
This guide walks you through how to prepare for year-end in Xero, step by step, in a way that is practical, manageable, and accountant-approved.
Why year-end preparation in Xero matters
Year-end accounts are not just a compliance exercise. They influence your tax bill, your understanding of how the business has performed, and often your plans for the year ahead.
When your Xero records are up to date and accurate:
- Your accounts are completed faster
- Errors are caught early rather than during filing
- Tax planning opportunities are easier to spot
- You spend less time answering follow-up questions
- You will become your accountant’s favourite client! 😉
Start with the basics: is your bank reconciliation up to date?
Before running reports or worrying about tax, take a step back and check whether your Xero bookkeeping including reconciliation is complete.
Bank reconciliation is one of the most important parts of preparing for year-end in Xero, and one of the most commonly misunderstood.
Every transaction on your bank statement should be matched to a corresponding entry in Xero. This includes:
- Customer receipts
- Supplier payments
- Bank charges
- Card fees
- Transfers between accounts
Unreconciled transactions are a red flag at year-end. They often indicate missing expenses, duplicated entries, or mispostings that affect your profit figure. You can use Xero’s automatic bank reconciliation feature to streamline what can be a lengthy manual process.
Check that income has been reconciled using the correct nominal code, particularly if you have more than one income stream.
Take the time to clear outstanding items and investigate anything that does not make sense. Flag up anything you are unsure of in detailed notes for your accountant.
Review sales invoices and income
Next, look closely at your income.
Check that:
- All invoices for the year have been raised
- Payments are allocated to the correct invoices
- Bad debts are identified where customers are unlikely to pay
In Xero, unpaid invoices can inflate turnover if they are not reviewed carefully. Your accountant may need to adjust for irrecoverable debts, but flagging them early makes the process smoother.
Check expenses, bills, and VAT coding
Expenses are another area where small errors add up over a year.
Review your bills and expenses and ask:
- Are expenses coded consistently?
- Is VAT applied correctly?
- Are personal and business costs clearly separated?
Common issues include VAT being claimed where it should not be, or expenses being posted to vague accounts that make analysis difficult later.
If you are VAT registered, accuracy here is especially important. Incorrect VAT treatment can lead to adjustments, penalties, or delays if discovered late.
Don’t forget director transactions and drawings
For limited companies, director transactions often cause confusion at year-end.
This includes:
- Director loan accounts
- Personal expenses paid by the business
- Money taken out that is not salary or dividends
Xero will record these movements, but it does not decide how they should be treated for tax. That interpretation happens at year-end.
Make sure these transactions are clearly identified and not mixed in with general expenses. It saves time and reduces the risk of unexpected tax consequences later on.
Review payroll, pensions, and CIS
If you run payroll through Xero or another system, make sure everything aligns.
Check that:
- Payroll reports match what has been filed with HMRC
- Pension contributions are recorded correctly
- CIS deductions and statements are up to date, if applicable
Discrepancies between payroll records and bookkeeping often surface at year-end. Catching them early avoids last-minute corrections and explanations.
Look at fixed assets and depreciation
Items such as equipment, vehicles, or machinery should usually be treated as fixed assets rather than everyday expenses.
In Xero, check:
- Whether large purchases have been posted correctly
- If assets should be capitalised rather than expensed
- Whether depreciation has been recorded
Your accountant will usually handle depreciation calculations, but making sure assets are clearly identified in Xero makes this far more straightforward.
Run the key Xero reports
Once your records are tidy, it is time to run the Xero reports that matter.
At a minimum, review:
- Profit and Loss
- Balance Sheet
- Aged receivables and payables
- Bank reconciliation summary
Do not worry if you do not fully understand every figure. What you are looking for are obvious issues: negative balances that do not make sense, large unexplained movements, or figures that feel out of line with how the year actually went.
If something looks odd, flag it for your accountant to take a closer look during their review.
How Linggard & Thomas can help with your Financial Year-End
At Linggard & Thomas, we are specialist Xero accountants that can help small businesses turn Xero data into clear, compliant year-end accounts, without the stress.
Whether you need a final review, help fixing problem areas, or full year-end support, we work with your Xero records to make the process efficient and straightforward. Our year-end accounts service includes everything you need to understand your key financial data and plan for the next year.
If you would like support preparing for year-end, please get in touch with Linggard & Thomas today. A short conversation now can save a lot of time and uncertainty later.
