Xero tracking categories let you tag transactions to departments, locations or other segments so you can report on performance without building a separate chart of accounts. You can have a maximum of four categories in total, with two active at any time, and Xero recommends keeping roughly 100 options per category so reports stay quick to load. This guide walks through setup, transaction tagging and reporting so you can put tracking to work straight away, especially helpful for businesses needing detailed logistics insights with specialised billing and accounting solutions like those found in Freight Forwarding Billing & Accounting Software.
TL;DR:
- Xero’s tracking categories allow tagging transactions for segments like location or department, with a maximum of four categories and 100 options per category to maintain report speed.
- Small businesses primarily use tracking categories for performance by location, department, or product line, while Projects track job-specific costs and profitability.
- Setting up categories involves simple steps within Xero, with best practices including naming consistency, archiving unused options, and assigning tags accurately during transactions.
- Reports like the Tracking Summary and Profit & Loss compare provide insights into segment performance but require lean option lists to avoid slow load times.
- A structured rollout over 90 days, with designated ownership and disciplined naming, prevents clutter and ensures reliable data for ongoing reporting and audits.
Table of Contents
- Tracking categories versus Projects: which one do you need?
- Step-by-step: set up tracking categories and add tracking options in Xero
- Assign tracking options to transactions across Xero
- Limits, naming conventions and best-practice guidelines
- Using tracking categories in reports: Tracking Summary and Profit & Loss compare
- Advanced tips: combining tracking categories with Projects and integrations
- Rollout checklist and common pitfalls
- How eAccounts can help with Xero setup and ongoing reporting
- Sources
- FAQ
Tracking categories versus Projects: which one do you need?
Tracking categories are labels you attach to transaction lines across your chart of accounts. They let you slice your existing income and expense accounts by whatever segment matters to your business, without duplicating account codes.
Projects work differently. They track time, costs and profitability for a specific job or contract, giving you a dedicated profit and loss for that project rather than a segment of your overall accounts.
Small businesses typically use tracking categories for:
- Location: comparing a shop in Leeds against one in Bristol.
- Department: separating sales, production and admin costs.
- Product line: seeing which range of stock actually earns its shelf space.
If you need per-job costing with time entries and quotes, Projects is the better fit. If you want to see how different parts of the same business perform, tracking categories do the job.
Step-by-step: set up tracking categories and add tracking options in Xero
Setting up tracking categories takes a few minutes once you know where Xero hides the settings.
- Go to Accounting, then Advanced, then Accounting settings, and open Tracking categories.
- Select “Add tracking category” and give it a clear name, such as “Location” or “Department”.
- Add each tracking option under that category (for example, “Leeds” and “Bristol” under Location).
- Reorder options by dragging them into the sequence you want them to appear in on transactions and reports.
- Save the category once every option you need is listed.
- To retire an option without losing history, archive it rather than deleting it: archived options disappear from dropdowns but still show correctly in past reports.
- Only users with the adviser or standard role and settings access can add or edit categories, so agree who owns this before you start.
Pro Tip: Draft your category names and full option list on paper first. Renaming options after invoices have gone out causes more confusion than it solves.
Deleting an option that has been used on transactions isn’t possible in the same way as archiving, so treat archiving as your default way of retiring anything you no longer need active.
Assign tracking options to transactions across Xero
Once categories exist, the tracking dropdown appears automatically on the transaction types that support it.
- On invoices and bills, the tracking fields sit at the line level, so a single invoice can carry different tags across different rows.
- On spend money, receive money and manual journals, you can assign tracking option by option, per line, which matters when one payment covers costs for more than one location or department.
- Repeating invoices and bills carry their tracking settings forward automatically, so set them correctly once and they stick.
- Bank rules can apply tracking automatically to matched transactions, which saves a lot of manual tagging once rules are configured.
- Transactions imported via CSV or bank feeds don’t inherit tracking automatically. You need to tag them individually or through a bank rule after import.
Getting the line-level habit right early avoids a backlog of “Unassigned” transactions in your reports later.
Limits, naming conventions and best-practice guidelines
Xero caps every organisation at four tracking categories in total, with two active at any time, whether you’re a sole trader or a multi-site limited company. Within each category, Xero recommends around 100 options as a practical ceiling: go beyond that and reports start to slow down noticeably.
A few habits keep tracking usable as the business grows:
- Use short, consistent names (postcodes, standard department codes) rather than free-text variations that drift over time.
- Check for near-duplicate options before adding a new one, since “Leeds Store” and “Leeds Shop” will split your reporting in two.
- Archive options the moment they stop being active, rather than letting the list grow indefinitely.
- Review the full list every quarter and remove anything nobody has used in months.
Pro Tip: Give one person ownership of tracking categories. Letting several people add options independently is the fastest way to end up with a messy, duplicated list.
Governance matters more than the setup itself. A category structure that looked sensible on day one can become unusable within a year if nobody controls who add new options.
Using tracking categories in reports: Tracking Summary and Profit & Loss compare
The two reports built for this job are the Tracking Summary report and the Profit & Loss compare view.
The Tracking Summary shows activity for each tracking option across chosen account types and date ranges, with opening and closing balances and net movement for each option. Any transaction that wasn’t tagged shows up as “Unassigned”, which is a useful way to spot gaps in your tagging discipline before they distort a board pack.
Profit & Loss compare lets you put tracking options side by side in separate columns, combining options from different categories in a single view. Xero only displays columns that actually contain transactions, and selecting comparison periods at the same time as tracking categories isn’t supported, so you choose one or the other for a given report run. Selecting a large number of variables also slows report load times, which is one more reason to keep option lists lean.
In practice, this covers most of what a small business needs:
- A location-by-location profit and loss to see which site is actually profitable.
- A department cost analysis showing how spend splits between sales, production and admin.
- An export to a spreadsheet or board pack once the report is filtered the way you want it.
Advanced tips: combining tracking categories with Projects and integrations
Larger or more complex businesses often need both tools at once. Tracking categories handle segment-level reporting (location, department), while Projects handles job-level costing underneath it, for example tracking hours and materials for a specific client contract within a wider “Department” tag.
If you connect Xero to other software through the Tracking Categories API, a consistent naming scheme becomes essential: integrations map to category and option names directly, and a rename on the Xero side can silently break a report on the other end.
Disciplined tracking also pays off at year end. Clean, consistently tagged transactions make reconciliation and audit checks noticeably faster, because nobody has to guess what an “Unassigned” line was meant to represent.
Rollout checklist and common pitfalls
A tracking category rollout works best over roughly 90 days: design your categories and full option list on paper, pilot on one cost centre for a month, train whoever tags transactions, then enforce it through bank rules and repeating transaction templates. Rushing straight to a live rollout across every department at once is where most businesses lose control of the list.
The two mistakes I see most often are far too many options added ad hoc, and near-identical names created by different people tagging the same thing two different ways. Both are avoidable with one owner and a short naming standard agreed before anyone starts tagging. When tracking categories are set up for a client, this design-and-pilot stage is where most of the value gets locked in, well before the first report is pulled.
— Kris
How eAccounts can help with Xero setup and ongoing reporting
Designing a tracking category structure that still makes sense a year later takes more than ticking a box in Xero. eAccounts pairs each client with a dedicated accountant who builds the category and option structure around your business, sets up the reports you actually need, and keeps an eye on tagging discipline as transactions come in.
This typically covers:
- Xero Online Accounting setup, including tracking category design suited to your business.
- Ongoing bookkeeping support so tagging stays consistent month to month.
- Reporting reviews so location, department or product line performance is easy to check whenever you need it.
If you’d rather have this handled than manage it yourself, our small business accounting packages start from £29 per month and include ongoing support from your dedicated accountant.
FAQ
What is the difference between tracking categories and Projects in Xero?
Tracking categories tag transactions across your existing chart of accounts to report on segments like location or department. Projects instead track time, costs and profitability for a specific job, giving that job its own dedicated profit and loss rather than a slice of the wider accounts.
How to edit tracking categories in Xero?
Go to Accounting, then Advanced, then Accounting settings, and open Tracking categories to rename a category or add, reorder and archive its options. Archiving rather than deleting keeps historical reports accurate for any option that has already been used on a transaction.
How many tracking category options can you have in Xero?
Xero doesn’t enforce a hard cap on options, but it recommends around 100 per category to keep reports loading quickly. You’re also limited to four tracking categories in total, with only two able to be active at the same time.
Why is Xero plummeting?
This question likely refers to Xero’s share price rather than the accounting software’s functionality, and it isn’t something this article covers. For questions about setting up or reporting on tracking categories within your own Xero organisation, the setup and reporting sections above cover the practical detail.
