Hire Purchase
MEANING
• Hire purchase is a strategy for selling products. In a hire purchase transaction the
merchandise are let out on hire by a finance organization (creditor) to the hire
purchase customer (hirer). The purchaser is required to pay a concurred sum in
periodical portions during a given period. The responsibility for property stays
with loan lender and gives to hirer on the instalment of last portion.
• Hire purchase implies an exchange where products are bought and sold on the
terms that, (j) Instalment will be paid in portions, the possession of goods give to
purchaser to promptly (ii) the property (ownership) in the merchandise stays with
the seller till the last instalments is paid (iii) the vendor can repossess the positive
qualities in a default in instalments (iv) each instalment is treated as hire changes
till the last portion is paid.
FEATURES OF HIRE PURCHASE
• The instalment is to be made by hirer (buyer) to hire as a rule the vendor, over a predetermined time
frame.
• Under the hire purchase scheme the purchaser immediately takes possession of the products and
agrees to pay in instalments the total hire purchase price
• Every instalment shall be treated as hire charges.
• On delivery of last instalment, the possession of the goods passes on to the hirer.
• In the case that default done by buyer in paying of any instalment the seller has the right to repossess
the buyer’s good and to lose the sum already earned by treating it as hire payment.
• The hirer has the privilege to end the agreement whenever before the property passes. He has the
choice to restore the goods where in case he need not pay instalment falling due from that point, be that
as it may, he cannot recoup the aggregates previously paid all haring considered legally hire charges on
the good being referred to.
TERMS OF HIRE PURCHASE
(a)Hirer / Hire purchaser/ buyer – The person who buy the goods under
hire purchase contract.
(b)Hirer/ Hire Vendor / Seller – The person who sells the goods to buyer
under hire purchase contract.
(c)Hire purchase agreement- Agreement containing information such as
the purpose and terms of the contract, starting time of agreement,
termination etc.
(d)Hire charges – The value of the instalment incurred by the hirer plus
interest. Hire charges also include the penalty for delayed payment .
ACCOUNTING AND FINANCIAL EVALUATION
• Asset Accrual Method
• Total Assets Value Method
ACCOUNTING EVALUATION OF HIRE PURCHASE
(a) Asset Accrual Method: - In this form the hire purchaser is deemed to be
the owner of the asset up to the amount of the cash price paid by him is
the down payment or the cash price charged used in different instalments.
Using the process the journal entries are registered:-
On taking the delivery of asset (No entry is recorded)
On making the down payment (if any)
Asset a/c Dr. (Amount of down payment)
To cash /bank A/c
On becoming the instalment due
Asset a/c Dr. (Balancing figure)
Interest a/c Dr. (Amount of Interest)
To Hire-Vendor a/c (Amount of Instalment)
On payment of instalment
Hire-vendor a/c Dr. (Amount of instalment)
To cash / bank a/c
On charging the depreciation:-
Depreciation A/c Dr. (Amount of Depreciation)
To Asset A/c
On transfer of interest and depreciation to P/L account:-
P/L A/c (Total amount)
To Interest A/c (Balance of Interest A/c)
To Depreciation A/c (Balance of depreciation A/c)
(b) Under Total Assets value method: - In this form of accounting in the hire purchaser’s
accounts, it is performs under the basis that the possession of the commodity is also
transferred with the sale of goods to the purchaser under this process; the following
journal entries are logged.
On taking the delivery of assets at the time of agreement
Asset a/c dr. (Cash price of asset)
To hire vendor A/c
On making the down-payment (if any)
Hire vendor A/c dr. (Amount of down payment)
To cash / bank a/c
On becoming the instalment due:-
Interest A/c dr. (Amount of Interest)
To Hire-Vendor A/c
On payment of Instalment
Hire - Vendor A/c Dr. (Amount of Instalment)
To Cash/bank A/c
On charging the Depreciations:-
Depreciation A/c dr. (Amount of depreciation)
To asset A/c
On transfer of interest and deprecation to P/L A/c
P/L A/c Dr. (Total)
To Interest A/c (Balance of Interest A/c)
To Deprecation A/c (Balance of Dep.A/c)
ACCOUNTING IN BOOKS OF HIRE-VENDOR:-
Hire Vendor:- these is only one system in the hire-vendor books to document the entries. It the entries in
the hire-purchaser’s books are passed under the asset accrual method or the total asset value process.
But the accounting entries in the hire vendor’s books are still passed under the total set process.
These inscriptions are as follows:-
On delivery of goods to hire purchaser at time of agreement
Hire Purchaser A/c dr. (cash prices)
To hire sales A/c
On receipt of cash at the time of agreement (down payment), if any
Cash / Bank a/c dr. (Amount of down payment)
To hire –sales A/c
On interest being due.
Hire-purchase A/c dr. (Amount of interest)
To interest A/c
On receipt of instalment:-
Cash /bank A/c dr. (Amount of instalment)
To hire-purchaser
On transfer of balance of hire-sales A/c to trading A/c cat the end of first year only)
Hire- sales a/c dr. (Cash price)
To Trading A/c
On transfer of amount of interest to P/L A/c
Interest A/c dr. (Balance of Interest A/c)
To P/L A/c
THANK YOU
