Xero Inventory: Tracked Items, Adjustments, Backorders and Returns

The catch is that tracked inventory isn't for everyone, and Xero says so. Its help articles say it isn't suitable if you take orders and payments through an eCommerce channel, already use a third-party inventory app, need purchase order receipting, manufacture or assemble goods and need to track components, or only update stock at month end or year end. Xero also uses the weighted average cost method only, so if you need FIFO or LIFO, it points you to an inventory app instead.

Untracked or tracked: which Xero inventory option fits

Untracked items are time savers. You pick one from your item list and the invoice or bill fills in the default price, account, tax rate and description, and you get some basic reporting on what you buy and sell. Tracked items go further: Xero records how many units you have, shows their value on the Balance Sheet and moves the cost to cost of goods sold as you sell. Tracked inventory is a stock feature and has nothing to do with tracking categories, which are for comparing areas of your business.

Behind the scenes, a tracked item uses an Inventory Asset account, which is a system account you can't journal to or from, and a Cost of Goods Sold account. When you sell, Xero reduces the item's value at its current average cost. If you've outgrown what Xero does natively, my roundup of inventory management software for small businesses is a good next stop.

Setting up tracked inventory and opening balances

Xero's setup article, written for its Canada and Singapore users, asks you to get three things ready first: inventory asset and cost of goods sold accounts in your chart of accounts, a physical stock count, and an opening balances date. That date is when Xero records the opening balances journal, not when tracking starts. Tracking starts the day each item is set up, and Xero doesn't backdate it. You also can't choose a date before a lock date.

1. Add your tracked items, one by one or by import.
2. In the Sales menu, select Products and services, click Import and choose Opening Balances.
3. Pick the opening balances date and download the template of your tracked items.
4. Fill in Quantity on Hand, Total Value on Hand and the Adjustment Account for each item, leaving the first three columns and the header row untouched.
5. Save it as a CSV, upload it with Browse, review the summary and click Complete Import.
6. Run the Inventory Item List report to check your balances.

Xero is blunt about getting this right: opening balances entered wrongly and corrected later can produce negative inventory balances, which cause errors. The import handles up to 4,000 tracked items. If you don't know where your stock value currently sits, there's an option that uses the Historical Adjustment account so your accountant can sort it out later.

Adjusting stock without breaking your books

Adjustments are for stocktakes, write-offs such as damaged goods, or anything a normal sale or purchase doesn't cover. There are three types as of October 2026.

Adjustment type	What it changes	Watch out for
Increase quantity	Adds units, valued at the current average cost or a cost price you enter	Can be done for several items at once
Decrease quantity	Removes units, valued at the current average cost	Can't take the quantity on hand below zero
Revaluation	Changes average cost and total value without touching quantity	Items can only be revalued one at a time

Three rules matter. If you need to cut both quantity and value, do the decrease first, then the revaluation. Each bulk adjustment can include up to 1,000 items. And once posted, an adjustment can't be edited or deleted, so you fix a mistake with another adjustment that reverses it.

Bundles, backorders and returns

Xero has no built-in bundle feature. It suggests three workarounds: an untracked bundle item on the invoice with manual stock adjustments for each tracked component, listing each tracked component on the invoice with a discount, or an inventory app that handles bundles. With the component option, approving the invoice reduces each item's stock automatically.

Backorders work differently from what the suitability advice suggests. If you approve an invoice for more units than you have, Xero records a backorder and the quantity available goes negative. A bill, a spend transaction, a customer credit note or an increase adjustment then fills it, oldest approved invoice first. You can't create a backorder from a receive transaction or a decrease adjustment, and the Open Backorders report shows what's outstanding.

For returns, you use a credit note with the item code. A customer credit note puts the quantity back and credits cost of goods sold at the item's current average cost, which may differ from the cost when it was sold. If the item's damaged and won't go back into stock, add a decrease adjustment as well. Xero Central's UK article notes that organisations on the Ledger plan can't enter credit notes and use a spend transaction with three lines instead. Once stock is moving, my guide to Xero invoicing covers the sales side.

Converting items and fixing common Xero inventory errors

You can convert an untracked item to tracked one at a time or in bulk through export and import, but enter every outstanding transaction using it first, because tracking starts from the conversion and can't be backdated. Items used on a repeating invoice or bill can't be converted until you remove them from it, and the conversion can only be reversed in some situations.

The most common error says an item would end up with zero quantity but a value that isn't zero. It usually means the quantity or value has gone negative, or a sale or credit would empty the stock at a price that doesn't match the average cost. Xero checks balances at today's date, even for a backdated transaction. Remember that drafts, quotes and purchase orders don't change quantities; only approved or saved transactions and posted adjustments do. You can't delete a tracked item that's been used or has an opening balance, but you can convert it to untracked first, or archive it.

My verdict on Xero inventory

I'd use tracked inventory in Xero if you sell finished goods on invoices, have a manageable item count and want stock value on your Balance Sheet without another subscription. I'd skip it if you sell through an online shop, assemble products or need purchase order receipting, because Xero itself says an app suits you better.

Stock counts, reorder checks and matching sales to stock are tasks I often see teams hand to automation. I run AI training and workshops for teams, and help businesses with AI enablement and workflow automation, so the busywork runs itself and people get time back. Most of that work is with SaaS marketing teams and small businesses. Here's how we can work together.

Frequently asked questions

Does Xero have inventory management?

Yes. Xero Inventory, under Products and services, offers untracked items for saving transaction details and tracked items that record quantity, value and cost of goods sold.

How many items can Xero tracked inventory handle?

Xero suggests an inventory app if you have more than 4,000 items to track, and you can only import opening balances for up to 4,000 tracked items.

Can I edit an inventory adjustment in Xero?

No. Once an adjustment has been made, it can't be edited or deleted. You enter another adjustment to reverse or correct it.

Does Xero support bundles?

Not natively. Xero suggests an untracked bundle item with manual stock adjustments, component items plus a discount, or an inventory app that includes bundles.

Which costing method does Xero inventory use?

Tracked inventory uses the weighted average cost method. If you need FIFO or LIFO, Xero suggests an inventory app.