The short answer
Tracking categories in Xero help you see which revenue streams are profitable and which areas of your business are running at a loss.
Tracking categories in Xero let you split your profit and loss by revenue stream, project, team or location. Without them, you only see one total for income, expenses and profit. With them, you can see which parts of the business make money and which ones lose it, so you can price, staff and invest with confidence.
What are tracking categories?
They are tags you add to transactions in Xero. You can set up to two active categories, each with multiple options. For example:
Category 1: Service with options Bookkeeping, Payroll, Advisory
Category 2: Location with options Richmond, Geelong
Every invoice, bill and bank transaction can be tagged with one option from each category.
What can you see once they’re set up?
Run the Profit and Loss report and filter or group it by tracking category. You will see income, direct costs and gross profit for each service, project or location side by side. That turns “we made a profit” into “Advisory made 40% margin, Payroll made 8%”.
How do you set them up?
In Xero, go to Accounting > Advanced > Tracking categories.
Create a category (e.g. Service) and add its options.
Add tracking to bank rules, so regular transactions are tagged automatically.
Tag invoices and bills as you create them.
Review the tracked P&L monthly.
Keep options simple. Too many options make tagging inconsistent and reports less reliable.
What are good uses for tracking?
Service lines or product ranges
Locations or stores
Projects or jobs (for simpler job tracking)
Departments or teams
A typical Melbourne scenario
A Geelong building company tracked income and costs by project type: renovations and new builds. Overall the business looked healthy, but the tracked P&L showed renovations were barely breaking even once materials and subcontractors were counted. They repriced renovation quotes by 15% and focused marketing on new builds, lifting overall margin within six months.
Key takeaways
Tracking categories split your P&L by service, project or location.
Up to two active categories, each with multiple options.
Add tracking to bank rules and invoices so it’s consistent.
Use the tracked P&L monthly to find what’s really profitable.
General information only.
Read how to track the profitability of your services and what business owners should review each month, or see our Xero bookkeeping services.
Marissa has over eight years of bookkeeping experience and a genuine passion for helping businesses take control of their finances. She's proactive, precise, and committed to making bookkeeping easy, accurate, and stress-free for every client she works with. Whether it's reconciling accounts, tracking cash flow, or streamlining financial systems, she's across the detail so you don't have to be.
