When we prepare your financial statements, we include a profit and loss account and a balance sheet. These summarise the transactions throughout the year, including those coming from the business bank account(s). The thing is - Xero needs to allocate those bank transactions as income or expenses in the profit and loss account, or an asset or liability in the balance sheet. The only way to do this is by assigning an account code during the reconciliation process.
Your GST return needs to show:
- Income declared for GST purposes
- Expenses where GST is claimed
- Transactions which have no GST (such as bank fees, interest, and wages)
- Transactions where the GST rate is 0% (mainly for imported and exported goods and services)
By reconciling Xero, you're making sure that each transaction is automatically assigned to one of those four categories.