Interest Expense Recognition

Accounting treatment for interest on loan repayments. Critical for accurate P&L reporting and income tax lodgement. Currently unrecognised for both Lumi (~$29,530 in FY25 alone) and Westpac ($2,315/month repayment includes interest component), creating material misstatement on Pride’s financial statements.

Principle

When a borrower makes a loan repayment, the payment includes two components:

1. Principal — reduction in the loan liability (Balance Sheet)
2. Interest — cost of borrowing (P&L Expense)

These must be split and coded to separate accounts:

• Principal → reduces the loan liability account (e.g., 503 Lumi Loan, WL Westpac Loan)
• Interest → P&L expense account (e.g., 600 Interest Expense, or loan-specific account like WLI Westpac Loan Interest)

Without proper splitting, both impacts are concealed:

• Loan liability understated (paid down too fast)
• Interest expense understated (P&L overstated; taxable income overstated)

Lumi Facility ($144,890.81 current balance)

Current state:

• All $1,603.63 weekly repayments coded entirely to account 503 (loan liability)
• Zero interest expense recorded in FY25
• Estimated interest in FY25: ~$29,530 (entirely missed)

Problem: Lumi charges interest embedded in the weekly repayment amount. Without the loan schedule, impossible to split principal vs interest retroactively or going forward.

What needs to happen:

1. Obtain Lumi loan amortisation schedule showing principal and interest for each payment date
2. Retrospectively allocate prior repayments (from Mar 2024 onwards) to principal vs interest
3. Post corrective journal to P&L for FY25 missed interest deduction
4. Set up ongoing bank rule so future repayments auto-split correctly
5. Possibly file amended tax return for FY25 (if lodged) to claim deduction

Tax impact if not corrected: FY25 taxable income overstated by ~$29,530 (roughly $8,850 additional tax at 30% rate).

Westpac Loan ($88,425 net principal after repayments)

Current state:

• Monthly repayment of $2,315.00 coded entirely to account WL (loan liability)
• Currently being miscoded to account 901 (wrong account) instead of WL
• Zero interest expense recorded; full amount reducing loan liability
• Likely split: ~$1,100–$1,200 principal, ~$1,100–$1,200 interest (estimated; requires schedule to confirm)

Problem: Westpac loan schedule not obtained. Cannot determine actual principal vs interest split.

What needs to happen:

1. Obtain Westpac loan amortisation schedule (contact Westpac for schedule for loan initiated Oct 2025)
2. Correct account coding (phase 1): Transfer 901 balance ($11,575) to WL
3. Retrospectively allocate prior 5 repayments (Nov 2025–Mar 2026) to principal vs interest
4. Post corrective journal for FY25 interest deduction
5. Set up bank rule so future $2,315 repayments auto-split (principal to WL, interest to WLI)

Tax impact if not corrected: Estimated ~$6,000–$7,500/year in interest deduction missed (across FY26 onwards).

Accounting Mechanics

Approach 1: Split at bank rule level (recommended)

• Set up separate bank rule for each loan
• Rule splits the repayment at point of bank feed entry
• Example: Westpac $2,315 repayment creates two entries automatically:
  • DR WL $1,100 (principal)
  • DR WLI $1,215 (interest)
  • CR Bank $2,315

Approach 2: Manual journal approach

• Record full repayment to loan account first (as currently done)
• At month-end, post manual journal to separate interest:
  • DR WLI $1,215 (interest expense)
  • CR WL $1,215 (reduces loan liability to correct net)

Xero setup:

• Create interest expense accounts if not already present:
  • WLI (Westpac Loan Interest) — currently exists but unused
  • LI (Lumi Interest) or similar — may need to create
• Configure bank rule to auto-split using loan schedule percentages or fixed amounts

Historical Impact

FY25 Lumi interest: ~$29,530 entirely unrecognised FY26 Westpac interest (annualised): ~$13,800 ($2,315 × 12 months ÷ 2 estimated interest rate) Combined annual interest understatement (going forward): ~$43,000+

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Intercompany Loan Formalisation (April 2026)

Added per Hospitality Debt Restructuring Research.

The undocumented $124,000 interest-free intercompany loan must be formalised independently of any bank debt consolidation. Key actions:

1. Create formal loan agreement — document the principal amount, parties, date of advance
2. Set arm’s length interest rate — required under ATO thin capitalisation rules (post-July 2023). The rate should reflect what an unrelated party would charge on an unsecured loan to a hospitality business (likely 7–10% p.a.)
3. Establish repayment schedule — even if payments are deferred, the schedule must exist
4. Tax adviser review — essential for thin capitalisation compliance

Do NOT include this loan in a bank consolidation — it would convert a zero-cost facility into one costing ~$9,300–$11,800/year in interest. Keep it separate, formalised, and interest-free (or at a minimal documented rate with deferred payments).

The arm’s length interest rate creates a notional interest expense that should be recognised in Xero even if payments are not yet being made. Consult the tax adviser on whether this should be an actual or notional charge.

See Debt Restructuring Options for the broader restructuring strategy.

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Related Pages

• Lumi — detailed account diagnostic with interest calculation notes
• Westpac — account coding correction and interest allocation
• Loan Accounts Diagnostic — all loan facilities and their accounting treatment
• Debt Restructuring Options — intercompany loan in context of full restructuring
• Hospitality Debt Restructuring Research — source: intercompany loan analysis
• Tax Lodgement — ITR preparation blocked until interest properly allocated
• Financial Reporting — P&L impact of unrecognised interest