Categories and options
A tracking category is the heading, such as Region, and the options are the values, such as North and South. Each transaction line may carry a value from each category. The number of categories allowed depends on the Xero plan, and option lists can be edited later. Choose a purpose before you create anything.
Set them up
Go to the settings for tracking categories, create a category, and add the options. Name the category by the question you want to answer, not by who asked for it. Keep options stable, since renaming too often confuses history. If you are tempted to create an option for every customer, consider whether the contact reports already give that view.
Apply tracking to transactions
On invoices, bills and spend money entries, choose the option on each line. You can also set a bank rule to apply it during reconciliation. Repeating invoices can include tracking so recurring revenue goes to the right place. Lines left blank end up in an untracked group, which weakens your reports.
Reports by tracking category
In reports such as Profit and Loss, choose to display by a tracking category, and Xero produces columns for each option. The balance sheet is not split in the same way. Compare totals across the columns with the full report to make sure nothing is missing. If a large amount sits in the blank column, find the untagged transactions and fix them.
Shared costs and pitfalls
Rent and administrative salaries serve everyone. Decide whether to allocate them by a percentage, headcount or space, or leave them as central cost. Do this the same way each month. Journal entries can move shared costs between options. Avoid using tracking as a substitute for a chart of accounts, since the account tells you what the item is, while tracking tells you who or where. Revisit the structure each year and retire options that you no longer use.
If you plan to change the category structure in the middle of a year, ask your accountant first, because past reports may need to be re-tagged to remain comparable.
A small example
A catering company might create a category called Service line with options Events, Corporate lunches and Retail. Every invoice line picks one. At month end, the profit and loss by Service line shows that corporate lunches earn a steady margin while events swing widely. That insight might change which clients are pursued, and it came from one setting and consistent tagging.
Assign one person to maintain the list of options. Archive options that are no longer used instead of deleting them, so history stays intact. Teach everyone who enters transactions how each category is used, preferably with a one-page guide. A tracking structure only gives accurate results if everyone applies it the same way.
Worked example with numbers
A business with two locations tags every invoice and bill with a region. Revenue is $40,000 East and $25,000 West; shared software cost of $1,300 is split 60/40 on revenue, so East carries $780 and West $520. The profit and loss by tracking category then shows each region's margin, and the two columns plus untagged must equal the company total.
Mistakes that cost money
Creating too many categories so nobody uses them. Leaving items untagged so reports have a large unassigned column. Changing category names mid-year without a note. Using tracking categories for something better handled by separate accounts.
Check your work
Run the profit and loss by tracking category and compare the total to the standard report. The unassigned column should be empty or explained.
Common questions
Can I add tracking to old transactions?
Yes, by editing each one or using bulk options where they exist, subject to any lock dates.
Is tracking the same as having separate companies?
No. Tracking splits reports within one organisation, while separate organisations keep fully separate books.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.