Guide · 6 min read

How to post loan interest in Xero

By the Loanbooq team · Updated 13 November 2026

Xero has no built-in way to charge interest on a loan, so most businesses post it as a manual journal at each month-end. This guide shows the journal for each side of a loan, how to enter it in Xero, and the mistakes that quietly throw a loan balance out.

Before you start

Each loan needs two accounts in your chart of accounts:

• The loan account on the balance sheet. A loan you made is an asset; a loan you received is a liability. Give each loan its own account, or its own tracking option, so its balance can be checked against the loan statement.
• An interest account on the income statement: interest income for loans you made, interest expense for loans you received. One account can serve many loans.

Some businesses add the interest to the loan account, so the loan grows each month until it is repaid. Others keep it in a separate interest receivable or accrued interest account. Either works, as long as every month is done the same way. Your loan agreement and your accountant will tell you which fits.

Step 1: work out the month's interest

Most loan agreements charge interest daily on the balance owed, on a 365-day year:

Say you lent R500,000 to a related company at 11.75% a year. October has 31 days, so October's interest is R500,000 × (0.1175 ÷ 365) × 31, which is R4,989.73.

If the balance or the rate changed during the month, split the month at each change and add the pieces together. How to calculate interest on a loan, day by day works through repayments and prime changes with examples.

Step 2: enter the manual journal in Xero

1. In Xero, open Manual journals (under Accounting, then Advanced) and choose New journal.
2. Write a narration that says what and when, such as "Interest on loan to ABC (Pty) Ltd, October 2026".
3. Set the date to the last day of the month the interest is for.
4. Add the two lines shown below, one debit and one credit, for the same amount.
5. Choose the tax rate. Interest on a loan is usually a VAT-exempt financial service, so most businesses use a rate with no VAT. Check with your accountant if you are not sure.
6. Check that debits equal credits, then post it, or save it as a draft for someone to review first.

A loan you made

The borrower owes you more, and you have earned income:

A loan you received

You owe the lender more, and you have an expense:

A quick check when the interest goes to the loan account: posting interest should always make the loan's balance bigger, whichever side of the loan you are on. If the balance went down, the debit and credit are the wrong way round.

Mistakes that throw a loan out

• A month posted twice, or skipped. Keep a record of the last month posted for every loan, and post the months in order.
• The wrong method. A twelfth of the yearly rate each month gives a different figure from daily interest. Use whichever the agreement says.
• A repayment or drawdown ignored. Interest after the payment date is on the new balance, not the old one.
• A missed prime change. A loan linked to prime changes rate on the date prime changes, which is often mid-month.
• No reconciliation. Compare the loan balance in Xero with the loan statement each month, so a mistake is found in the month it happens rather than at year-end.

When there are many loans

One loan is a few minutes a month. Twenty loans across several organisations, some linked to prime, some with repayments, is a spreadsheet, an afternoon and a real chance of a typing error. That is the work Loanbooq takes over: it reads each loan's balance and movements from Xero, works out the interest at the rate in force on each day, shows you every journal before it goes, and never posts the same month twice.