Guide · 5 min read
Intercompany loans in Xero: both sides, same figures
When one company in a group lends to another, the loan sits in two sets of books: an asset in the lender and a liability in the borrower. Every month both companies need the same interest, on the same date, to the cent. If they drift apart, the balances stop agreeing and the group accounts will not consolidate cleanly.
- Set the loan up in both companies, with intercompany accounts on each side.
- Post mirror-image interest journals every month, from the same rate and the same days.
- Agree the two balances every month, not just at year-end.
- Cross-border loans bring extra tax rules; get advice before setting the rate.
Set up both sides
| Company | Loan account | Interest account |
|---|---|---|
| The lender, HoldCo | Loan to SubCo (Pty) Ltd, an asset | Interest received: intercompany |
| The borrower, SubCo | Loan from HoldCo (Pty) Ltd, a liability | Interest paid: intercompany |
Keeping intercompany interest in its own accounts, apart from bank interest, makes it easy to find and cancel out when the group accounts are prepared.
The monthly journals, side by side
Example: HoldCo lends SubCo R2,000,000 at 10.5% a year. October has 31 days, so the interest is R2,000,000 × (0.105 ÷ 365) × 31 = R17,835.62. Both companies post it, dated 31 October:
In HoldCo's books
| Account | Debit | Credit |
|---|---|---|
| Loan to SubCo (Pty) Ltd | 17,835.62 | |
| Interest received: intercompany | 17,835.62 |
In SubCo's books
| Account | Debit | Credit |
|---|---|---|
| Interest paid: intercompany | 17,835.62 | |
| Loan from HoldCo (Pty) Ltd | 17,835.62 |
After both are posted, HoldCo's asset and SubCo's liability should be the same figure. Use the same narration in both, such as "Interest on intercompany loan, October 2026", so each side can be found from the other.
Keeping the two sides in step
The figures only match if both companies work them out the same way. The usual reasons they do not:
- One side posted, the other not. Post both companies' interest in the same month-end routine.
- Different methods. One company charges daily and the other a twelfth of the year, or they round differently. Agree one method in the loan agreement and use it on both sides. How to calculate interest on a loan, day by day shows how far apart the two can be.
- A rate change applied on different dates. A loan linked to prime must move on the same day in both companies.
- Money in transit. A repayment paid on the 31st by one company and received on the 1st by the other leaves the balances apart over month-end. Note it, and it clears itself the next day.
Compare the two balances every month. A difference found in the month it happens takes minutes to explain; one found at year-end can take days.
Consolidation
In the group's consolidated accounts, the loan and the interest cancel out: the group cannot owe itself money. That only works if both sides agree. Xero keeps each company's books separately, so consolidation is done outside it, in a spreadsheet or a consolidation app, using each company's figures. Matching intercompany accounts on both sides make that step quick.
A note on tax
Between South African companies in the same group, interest is generally income for the lender and an expense for the borrower. Loans that cross a border bring extra rules: the rate must be what unrelated parties would agree (transfer pricing), the borrower's deduction can be limited, and withholding tax can apply to the interest. Get advice before setting the rate on a cross-border loan, and keep the agreement on file.