Hire Purchase System
Q2. Hire Purchase System
Introduction In modern business, many people cannot afford to pay the full price of costly goods like
cars, machinery, furniture, or electronic items at once. To help such buyers, businesses introduced
a special method of purchase known as the Hire Purchase System.
Meaning of Hire Purchase Hire purchase is a type of credit purchase agreement where goods are
delivered to the buyer immediately, but the ownership passes only after all the installments are
paid.
Features of Hire Purchase System 1. Immediate Possession – Buyer gets possession of the goods
immediately. 2. Ownership after Full Payment – Ownership is transferred only when the final
installment is paid. 3. Payment in Installments – The price is divided into installments. 4. Interest
Element – Each installment includes part cash price and part interest. 5. Right to Repossess –
Seller can take back goods if buyer defaults. 6. Termination Option – Buyer may cancel by returning
goods.
Important Terms - Cash Price: Price if paid immediately. - Hire Purchase Price: Cash Price +
Interest. - Down Payment: Initial payment at possession. - Installments: Regular payments. -
Interest: Extra charge for paying in parts.
Difference between Hire Purchase and Installment System Hire Purchase: Ownership transfers
only after final installment. Seller can repossess goods. Installment System: Ownership transfers
immediately. Seller cannot repossess goods.
Accounting Treatment 1. Full Cash Price Method: Asset recorded at cash price, depreciation
charged, interest treated as expense. 2. Interest Suspense Method: Interest recorded separately
and transferred yearly.
Advantages - Buyer uses goods immediately. - Payment in small amounts. - Helps families and
businesses. - Increases seller’s sales.
Disadvantages - Higher total price due to interest. - Ownership only after final payment. - Buyer
may lose goods if default. - Encourages overspending.
Conclusion Hire Purchase helps buyers get costly goods on easy payments and benefits sellers
with higher sales, but it is costly compared to cash purchase.
Final Accounts with Adjustments
Q3. Final Accounts with Adjustments
Introduction At the end of an accounting period, businesses need to know profit/loss and financial
position. Final Accounts are prepared, which include Trading Account, Profit and Loss Account, and
Balance Sheet.
1. Trading Account Prepared to find Gross Profit or Loss. Gross Profit = Sales – (Opening Stock +
Purchases + Direct Expenses – Closing Stock).
Debit Side: Opening stock, Purchases, Wages, Direct Expenses. Credit Side: Sales, Closing Stock.
2. Profit and Loss Account Prepared to find Net Profit or Loss. Net Profit = Gross Profit + Incomes –
Indirect Expenses.
Debit: Salaries, Rent, Advertising, Depreciation, Bad Debts. Credit: Gross Profit, Commission
received, Interest received.
3. Balance Sheet Shows financial position (Assets and Liabilities). Assets = Liabilities + Capital.
Need for Adjustments Some items may not appear in trial balance. Adjustments make accounts
accurate.
Common Adjustments 1. Closing Stock – Credit in Trading A/c, Asset in Balance Sheet. 2.
Outstanding Expenses – Added to expense in P&L;, Liability in Balance Sheet. 3. Prepaid
Expenses – Deducted in P&L;, Asset in Balance Sheet. 4. Accrued Income – Added to P&L;, Asset
in Balance Sheet. 5. Unearned Income – Deducted in P&L;, Liability in Balance Sheet. 6.
Depreciation – Expense in P&L;, deducted from Asset. 7. Provision for Doubtful Debts – Expense in
P&L;, deducted from Debtors. 8. Free Samples – Deducted from Purchases, treated as
Advertisement Expense. 9. Interest on Capital/Drawings – Capital adjustments in P&L.; 10. Bad
Debts – Expense in P&L;, deducted from Debtors.
Importance of Adjustments - Shows true profit/loss. - Shows true financial position. - Ensures
accrual concept is followed. - Helps in decision-making.
Conclusion Final Accounts with Adjustments ensure true and fair view of business results and
position. Trading A/c shows gross results, P&L; shows net results, Balance Sheet shows financial
position. Adjustments are essential for accuracy and compliance with accounting principles.
