Interest is usually payable on hire purchase arrangements. We are often asked how to account for this interest.
Accounting for hire purchase interest is simple when using Xero and following this three step process.
#1- Establish your total interest figure and the period of the agreement
This information can be easily obtained from reviewing the hire purchase agreement.
#2 – Calculate the monthly interest
The main two options available are:
- Calculate the interest evenly per month (straight line method).
- Use the sum of digits method to calculate the interest over the life of the agreement in proportion to the outstanding balance.
For single Hire purchase agreements we recommend using the straight line method. For this method, simply divide the total interest by the total number of months to arrive at the interest charge per month.
For example, if total interest is £6,000 and the agreement is for 36 months then the monthly interest charge will be £166.67. The interest commences in March 2024 and ends in February 2027.
#3 – Updating Xero
Create a repeating journal in Xero to record the monthly interest.
Click on Accounting/Manual journals/New repeating journal and complete the information in a similar way to that shown in the example below:
