When you buy an asset on hire purchase there are a number of areas you need to ensure are correctly recorded
- Initial invoice – this is to ensure the correct costs go to the correct nominals
- VAT – with a HP agreement, you are entitled to claim the VAT back in full. Its important this is recorded correctly
- Deposit – the deposit payment usually accounts for the VAT element but can be higher – it should be accounted for separately to the VAT
- Liability – finally there will be the ongoing liability payments to correctly reflect
We’ll take each element in turn using a basic example;
New Company Van purchased for £10,000 +VAT
Deposit of £3,000
Remaining balance of £9,000 to be paid over 36 months
Initial invoice (+ VAT)
The initial invoice can be entered on Xero as any other bill. This may also involve:
- Xero email to bill
- Hubdoc
- Dext prepare or auto bill reading apps
The invoice should be entered in full and include the assets details, total net, vat and gross (see below) :

You’ve now also correctly recorded the full amount of the VAT on your next VAT return
Deposit
You’ll have paid the deposit out of the bank account so this should show on your bank reconciliation. However, as you are not paying off the full amount of the invoice you’ll need to manually use the match and split function in Xero (see below):

Remaining balance
It’s best practice to remove the remaining balance on the bill to a new nominal code in Xero. The Xero default nominal code is 910 – Hire purchase loan, but you may want to create your own. If that’s the case you should add it as a non current liability with No VAT default.
Importantly – ensure the ‘enable payments to this account’ is ticked (see below)

Once the account is set up – head into the outstanding bill and pay the Hire purchase value off to the nominal code created above (see below):

All the future payments can then be allocated against the hire purchase liability account (Tip – use Xero bank rules to automate this for you!)
Don’t forget – if there is an interest element to account for use our accounting for hire purchase interest guide.