Xero year end checklist: how to close the financial year in Xero

Short answer: Xero has no “close the year” button and needs no closing journal. On the first day of the new financial year it moves the old year’s profit from Current Year Earnings into Retained Earnings by itself, and the Profit and Loss starts again from zero. What closing the year really means is making the old year complete and then freezing it: reconcile every bank, card and loan account to the year-end date, clear drafts, post the year-end adjustments (stock count, depreciation, bad debts, accruals, prepayments, unbilled work), finish the payroll year, tie the Balance Sheet to outside evidence, hand the file to your accountant, enter their adjusting journals, and set a lock date at the year end. In the worked example below, six adjustments moved £19,300 of figures and cut the year’s profit from £46,800 to £42,700, while the gross margin went up from 46.2% to 47.4%.

What Xero does at year end on its own

Happens automatically	Does not happen automatically
The year’s profit moves from Current Year Earnings into Retained Earnings on the first day of the new year	Nothing is locked. Anyone can still change last year until you set a lock date
The Profit and Loss for “this financial year” starts again from zero	Depreciation is not run, stock is not counted, bad debts are not written off
Balance Sheet accounts (bank, debtors, loans, VAT or GST) simply carry on	Tax on the year’s profit is not posted; your accountant works it out and journals it
Reports can still be run for any past year	Budgets do not roll forward; next year’s budget is set up separately

So the work is all on the “does not happen” side. The retained earnings guide explains the two equity lines if they look wrong after the new year starts.

The year end checklist

#	Step	When	Done when
1	Check the financial year end in Financial settings	Before year end	It matches the year your accountant and the tax office use
2	Reconcile every bank, credit card, loan and clearing account to the last day	Within days of year end	The Bank Reconciliation report at the year-end date equals each statement
3	Clear draft and awaiting-approval invoices and bills	Within days	Nothing for the old year is left in draft
4	Invoice work finished in the year, and enter late supplier bills on their invoice date	2 to 4 weeks after	Every sale and cost of the year is in the year
5	Count stock on the last day and post the closing stock journal	On the day, posted after	The stock account equals the count
6	Run depreciation to the year-end date	After step 2	The fixed asset register and the Balance Sheet agree
7	Write off debts you will not collect	After a debtors review	Aged Receivables shows only debts you expect to be paid
8	Accrue costs with no bill yet; move prepaid costs to the next year	After step 4	The year carries its own costs, no more, no less
9	Finish the payroll year (see below)	Payroll deadlines	Final submission sent; payroll liabilities match the payroll reports
10	Tie the Balance Sheet to outside evidence	Before the handover	Debtors, creditors, loans, VAT or GST and payroll match their reports and statements
11	Give your accountant access and the papers they ask for	1 to 2 months after	They have adviser access, the stock count and the asset purchases
12	Enter or check their adjusting journals, then set the lock date	When the accounts are final	Xero’s figures equal the final accounts, and the year cannot change

The month end checklist covers steps 2 to 4 and 8 in more detail; at year end they are the same checks, done with more care because the figures go to the tax office.

A worked year end: a joinery company in Bristol

These figures are made up. Hollins Joinery Ltd has a 31 March year end and keeps its books in Xero on the accrual basis. On 2 April 2026 the year’s Profit and Loss showed a net profit of £46,800, and the director was already planning dividends from it. Then the year-end adjustments went in. Amounts are before VAT.

Adjustment	What was found	Effect on profit £	Balance Sheet line
Unbilled work	A £3,500 kitchen fit finished on 27 March was invoiced on 3 April	+3,500	Accounts Receivable
Closing stock	The stock account still held last year’s count of £4,100; the 31 March count was £6,200	+2,100	Stock
Depreciation	Never run during the year: £8,400 on the van and the workshop machinery	(8,400)	Fixed assets
Bad debt	A customer in liquidation owed £1,800	(1,800)	Accounts Receivable
Accrual	The accountant’s fee for this year’s accounts, £1,500, not billed yet	(1,500)	Accruals
Prepayment	£2,400 of insurance paid on 1 February covers February 2026 to January 2027; £2,000 belongs to next year	+2,000	Prepayments
	Net change	(4,100)

Line	Before adjustments £	After adjustments £
Sales	312,000	315,500
Cost of sales	(168,000)	(165,900)
Gross profit	144,000	149,600
Overheads	(97,200)	(106,900)
Net profit	46,800	42,700
Gross margin	46.2%	47.4%

Brackets are costs. The six adjustments moved £19,300 of figures but changed profit by only £4,100 net, because some pushed it up and some down. Two things are worth noticing:

• Depreciation was the big one. Because it was never run during the year, every monthly report overstated profit by £700 a month. Running it monthly (see depreciation in Xero) would have shown the real run rate all year, not as a surprise in April.
• The margin rose while profit fell. The stock count and the unbilled job both sit above the gross profit line; the depreciation, bad debt and accrual sit below it. The jobs were more profitable than the unadjusted report said, and the overheads were heavier.

The £4,100 also matters for what can be paid out: a company can only pay dividends from profits after tax, so the director’s plan built on £46,800 had to shrink before any dividend was declared. The dividends guide shows how to work out the safe amount.

Each adjustment in Xero

Closing stock. If you do not track all stock in Xero’s inventory, count it on the last day, value it at cost, and post a manual journal that moves the stock asset account to the counted figure, with the other side to cost of sales (often a “closing stock” or “stock movement” account). The cost of goods sold guide shows the journal.

Depreciation. Register the year’s asset purchases in Fixed assets, then run depreciation to the year-end date. Assets bought during the year and coded straight to an expense or a suspense account are a common find; move them to the right asset account first. For tax, your accountant adds depreciation back and claims capital allowances (UK) or the tax depreciation rules (Australia, New Zealand) instead, but the accounts still need it.

Bad debts. Review Aged Receivables at the year end. A debt you no longer expect to collect is written off with a credit note to a bad debts expense account, not by deleting the invoice; the bad debt write-off guide shows the steps and how VAT or GST relief works.

Accruals and prepayments. A cost of the year with no bill yet is accrued with a manual journal (cost up, accruals liability up) that auto-reverses on the first day of the new year. A cost paid in the year that belongs to the next is moved to a prepayments asset. Accruals in Xero and prepayments in Xero each walk through the journal.

Unbilled work and late bills. Date the invoice or bill in the month the work was done. If the invoice must carry the later date, post an accrued income journal at the year end and reverse it in April.

Payroll year end: UK, Australia and New Zealand

The payroll year is the tax year, which is often not your financial year.

• UK (tax year 6 April to 5 April): send the last Full Payment Submission of the year marked as final, or a final Employer Payment Summary by 19 April. Give each employee a P60 by 31 May, and file P11D forms for benefits by 6 July. Xero Payroll sends these submissions to HMRC from the pay runs, so the job is to check them, not to build them.
• Australia (1 July to 30 June): make the Single Touch Payroll finalisation declaration by 14 July, which replaces payment summaries. Super is only tax-deductible in the year it is paid, so June quarter super paid in July counts in the next year.
• New Zealand (1 April to 31 March): payday filing has already reported each pay run to Inland Revenue, so there is no separate employer year-end return. Check that the PAYE liability on the Balance Sheet equals what was due for March.

In every country, compare the payroll liability accounts on the Balance Sheet with the payroll reports at the year end; the Xero payroll reports guide shows which ones.

Tie the Balance Sheet before the handover

Every Balance Sheet line should agree with something outside Xero. Debtors and creditors should equal the Aged Receivables and Aged Payables totals at the same date (aged reports guide); loans should equal the lender’s statement; the VAT or GST account should equal the final return of the year that is not yet paid (VAT return, BAS, NZ GST return); a director’s loan account should be what the director really owes or is owed; and suspense, clearing and Historical Adjustment accounts should be zero. The trial balance lists every balance on one page, which makes it the fastest way to work through them.

The handover to your accountant

Invite your accountant as a user with the adviser role (Settings, Users), so they can post journals and set lock dates. Send what is not in Xero: the stock count sheet, invoices for big asset purchases, loan statements, and a short note of anything unusual in the year. They usually post their own adjusting journals in Xero (tax, final depreciation, dividends); if they prepare the accounts in other software, ask for the journals and enter them, so Xero’s closing balances equal the final accounts and next year starts from the right numbers.

Deadlines for the formal accounts and returns, for a typical small business:

• UK limited company: accounts to Companies House within 9 months of the year end; corporation tax paid 9 months and 1 day after it; the Company Tax Return within 12 months.
• Australia: the tax return date depends on whether you lodge yourself or through a tax agent’s lodgment program, which often runs into the next calendar year.
• New Zealand (31 March balance date): the income tax return is due on 7 July, or later under a tax agent’s extension.

Lock the year

Xero has two lock dates in Financial settings. One stops everyone except advisers from changing anything on or before the date; the other stops everyone, advisers included. A common pattern: set the first one at the year end as soon as your own checks are done, so a payment reconciled to the wrong date cannot change the year while your accountant works; set the second once the accounts are final and filed. Only users with the adviser role can set or move lock dates. If Xero says “the lock date for this organisation is not set”, nothing has been locked yet.

Common mistakes

• Reading the year’s profit before the adjustments, then planning dividends or tax payments from it.
• Leaving last year’s stock count in the stock account, so cost of sales is wrong in both years.
• Running depreciation once a year, so every monthly report overstates profit.
• Deleting old unpaid invoices instead of writing them off with a credit note, which breaks the VAT or GST trail.
• Not entering the accountant’s adjustments in Xero, so the new year’s opening balances differ from the final accounts.
• Never setting a lock date, so last year’s figures change after the tax return was filed.

Common questions

Do I need to close the financial year in Xero? No closing journal is needed. Xero moves the year’s profit from Current Year Earnings into Retained Earnings on the first day of the new financial year, and the Profit and Loss starts from zero. What you do need is to make the year complete (reconciliations and year-end adjustments) and then set a lock date so it cannot change.

What is the year end process in Xero? Reconcile every bank, card and loan account to the last day; clear drafts; enter late bills and invoice unbilled work; post the closing stock, depreciation, bad debts, accruals and prepayments; finish the payroll year; tie the Balance Sheet to statements and reports; give your accountant adviser access; enter their adjusting journals; then set the lock date.

What are year-end adjustments? Entries that make the year’s figures complete and in the right year: closing stock, depreciation, bad debt write-offs, accrued costs with no bill yet, costs paid in advance for next year, work done but not invoiced, and the tax on the year’s profit. They often change profit by thousands even when the bank is fully reconciled.

How do I set a lock date at year end in Xero? In Financial settings, enter the last day of the financial year as the lock date. One lock date stops everyone except advisers, the other stops everyone. You need the adviser role to set either.

Can I still change last year after the year end in Xero? Yes, until a lock date is set. Any transaction dated in the old year, including one reconciled to the wrong date, changes last year’s profit and the Retained Earnings the new year starts from. That is why the lock date is the last step.

When should the year end be done? Reconcile and clear drafts within a week or two of the year end, post the adjustments once late bills have arrived (usually within a month), and hand over to your accountant within one to two months. The legal deadlines are later, but the year is most useful while it is still recent.

Does the financial year have to match the payroll year? No. Payroll follows the tax year (6 April in the UK, 1 July in Australia, 1 April in New Zealand), while a company’s financial year can end on another date. Each has its own year end steps.

The year, every Monday

ReportPilot does not post year-end journals or close your year. It reads your Xero figures and sends a short plain-English email every Monday: sales and profit against last month and the same month last year, cash in the bank, who owes you and how much is overdue, and bills due soon. Its dashboard shows 24 months of sales, profit and cash by month, so a year end holds fewer surprises. It asks Xero for read-only access, plans start at US$19 a month after a 14-day free trial with no card, and the pricing page has the bookkeeper and practice plans.