Professor Vipin 2014
Hire Purchase, Lease and Installment Purchase Systems
Concept of Hire Purchase
Purchase and sale of goods under a hire purchase system is different from cash sale and credit sale. In
case of cash sale, the buyer pays the lump sum to the seller and immediately ownership is passed along
with the goods. While in credit sale the payment is made in future. In these both cases the ownership
and possession of goods pass on the buyer. However, hire purchase system is a special system of
purchase and sale.
In hire purchase system, the buyer acquires the property by promising to pay necessary installment
payment of monthly, quarterly, half yearly or any other period. The period of payment has to be fixed
while, signing the hire sell agreement. Though, the buyer acquires the asset under hire purchase system
after signing the agreement, the title of ownership remains with vendor until the buyer squares up
his/her entire liability.
When the buyer pays the final installment and any other obligation according to hire purchase
agreement, only then the title of ownership of the goods would be transferred to hirer. If the hirer
makes default in the payment of any installment, the hire vendor has the right to re-possess the goods.
When the vendor re-possesses the goods due to the default of payment of installment, in this case the
amount already paid so far by the hirer will be forfeited.
Features Of Installment Purchase System
1. Installment purchase system is just like an outright credit sale of goods.
2. The buyer makes the payment in different installment over a period of time as agrees upon in
the agreement.
3. Under installment purchase system, the buyer gets the immediate possession as well as the
ownership of goods.
4. The seller cannot responses the good if the buyer made default in the payment of installment
but he/she can sue against the buyer for the recovery of amount due.
5. In case of default in the payment of installment, the total amount of installments already paid
by the buyer cannot be forfeited.
6. Under installment system, the buyer can sell or mortgage the goods even before clearing all the
installments.
7. Risks of goods/assets are to be borne by the buyer just after signing the agreement.
8. The buyer of the goods under installment purchase system has no right to return the goods to
the seller.
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Important Terminologies Of Accounting For Hire Purchase System
1. Hire seller/Hire vendor/Owner:A person who sells the goods to the buyer under hire purchase system
is known as hire seller.
2. Hirer/Hire purchaser/Hire buyer: The person who purchase goods from hire vendor or who obtains
the goods from an owner under hire purchase agreement is known as hirer.
3. Cash price/Cash value: It is a value of goods at which the goods may be purchased by the hirer for
cash.
4. Down Payment: The initial cash payment made by the hire purchaser to the vendor at the time of
signing the hire purchase agreement is referred as down payment.
5. Hire Purchase Price: The hire purchase price includes the cash price and interest to be paid on the
future installment. It is the total sum payable by the hirer to the vendor.
6. Hire Purchase Charge: The difference between the hire purchase price and the cash price as stated in
the hire purchase agreement is known as hire purchase charge.
Form and Contents of Hire Purchase Agreements
Every hire purchase agreement should state the following:
1.
2.
3.
4.
The hire purchase price of the goods to which the agreement relates.
Cash price of such goods
The date on which the agreement shall be deemed to have commenced.
The number of installments in which the hire purchase price is to be paid, the amount of each of
those installments, the date or mode of determining the date upon which it is payable and the
person to whom and the place where it is payable.
5. The goods to which the agreement relates in a manner sufficient to identify them.
Limitation on Hire Purchase Charges
They are calculated in respect of each of the cash price instalment corresponding to each of the hire
purchase system. The statutory charges should be lower of the following two limits:
a) The amount calculated at 30% of each cash price instalment
b) The amount calculated is according to
SC is statutory charges
CI is the amount of cash price installment expressed in rupees or fraction thereof.
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R is 10% or such higher rate as may be determined by the Central Government in consultation with RBI.
T is time expressed in years.
Right of the Hirer to Purchase with Rebate
The hirer may at any time by giving at least 14 days to the owner, complete the purchase of the goods.
He will have to pay or render to the owner the hire purchase price or the balance thereof as reduced by
the rebate calculated using:
Termination of Hire Purchase Agreement
The ire purchaser may at any time terminate the hire purchase agreement after giving the owner at
least 14 days notice in writng. The following provisions have been made in Hire Purchase Act:
a) Where the sum total of the amounts paid and amount due in respect of the hire purchase price
immediately before the termination exceeds one-half of the hire purchase price, the hirer shall
not be liable to pay the sum so named.
b) Where the sum total of the amounts paid and the amounts due in respect of the hire purchase
price immediately before the termination does not exceed one-half of the hire purchase price,
the hirer shall be liable to pay the difference between the said sum total and the said one-half or
the sum named in the agreement, whichever is less.
Example 1
ABC Company purchases a machine on the hire purchase system over a period of 5 years, payable by
annual installments of Rs. 10000. The vendor charges 10% per annum on the annual balances. The cash
value of the machine may be taken as the present value of the annuity of Re. 1 for 5 years at 10% per
annum. Reference to the annuity table shows that the present value of Re. 1 for five years at 10% per
annum is Rs. 3791. Calculate the cash price and the amount of interest included in each installment.
Solution 1
In this case, cash price of the asset is calculated on the basis of the present value of the annuity of one
rupee for five years at 10% which is Rs. 3791, calculated as:
Present value of Rs. 5 is Rs. 3791.
Hence the present value of Rs. 50000 will
Cash price of the machine is Rs. 37910.
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Year
Year 1
Year 2
Year 3
Year 4
Year 5
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Particulars
Cash price outstanding
Add: Interest @10% pa
Amount
37910
3791
41701
Less: 1st installment paid at end of the yr
10000
Amount Outstanding in beginning of the yr
Add: Interest @10% pa
31701
3170
34871
Less: 2nd installment paid at end of the yr
10000
Amount Outstanding in beginning of the yr
Add: Interest @10% pa
24871
2487
27358
Less: 3rd installment paid at end of the yr
10000
Amount Outstanding in beginning of the yr
Add: Interest @10% pa
17358
1736
19094
Less: 3rd installment paid at end of the yr
10000
Amount Outstanding in beginning of the yr
Add: Interest @10% pa
9094
906
10000
Less: 3rd installment paid at end of the yr
10000
Nil
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Accounting Entries
Books of the Hirer (When Asset is Recorded at Full Cash Price)
Sl No
Particulars
1 On Purchase of Asset
Asset Account
To Hire Vendor
(with full cash price)
2 On making cash down payment
Hire Vendor
To Cash / Bank
(with actual cash down payment)
3 For Interest Due
Interest Account
To Hire Vendor
(Interest is calculated on o/s amount
when installment is due)
On payment of hire purchase
4 installment
Hire Vendor
To Cash / Bank
(with amount paid)
5 For depreciation of the asset
Depreciation account
To Asset Account
(at end of the accounting period)
Books of the Hirer (When Asset is Recorded at Cash Price actually Paid)
Sl No
Particulars
1 On Cash Down Payment
Asset Account
To Cash / Bank
(with amount of cash down payment)
2 On Hire purchase installment due
Asset Account
Interest Account
To Hire Vendor
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(Asset account is debited, with amount
of cash price in each installment. The
interest on outstanding cash price is
debited to the interest account)
3 On making payment of the installment
Hire Vendor
To Cash / Bank
(with amount of installment paid)
4 For depreciation of the asset
Depreciation account
To Asset Account
(Depreciation is charged on full cash
price of the asset)
Sl No
Particulars
1 On sale of goods under hire purchase
Hire purchaser account
To Sales Account
(with full cash price)
2 On receiving cash down payment
Cash / Bank Account
To Hire Purchaser
(with amount of cash down payment)
3 For Interest Due
Hire purchaser account
To Interest Account
(Interest is calculated when any
installment becomes due on the
outstanding balance in the account of
the hire purchaser)
4 On getting payment of Installment
Cash / Bank Account
To Hire Purchaser
(with the amount of installment
received)
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Example 1
On 1st January 1992, A Ltd purchased from B Ltd five trucks under hire purchase system, Rs. 50000 being
paid on delivery and the balance in five installments of Rs. 75000 each payable annually on 31st
December. The vendor charges 5% per annum interest on yearly balances. The cash price on five trucks
was Rs. 375000.
Show how this transaction should be recorded in the books of both companies, if A ltd writes off
depreciation at 10% per annum on the written down value. Also show how the items will appear
balance sheet as on 31st December 1992.
Solution 1
Books of A (First Method)
Date
1992
Jan
Particulars
To B Ltd
Amount
375000
Date
1992
Dec
Particulars
By Depreciation
By Bal c/d
37500
337500
375000
By Depreciation
By Bal c/d
33750
303750
337500
By Depreciation
By Bal c/d
30380
273370
303750
By Depreciation
By Bal c/d
27340
246030
273370
By Depreciation
By Bal c/d
24600
221430
246030
Date
Particulars
Jan-92 By Truck a/c
Dec-92 By Interest a/c
(5% on 325000)
Amount
375000
16250
375000
1993
Jan
To Balance b/d
337500
1993
Dec
337500
1994
Jan
To Balance b/d
303750
1994
Dec
303750
1995
Jan
To Balance b/d
273370
1995
Dec
273370
1996
Jan
To Balance b/d
246030
Amount
1996
Dec
246030
B Ltd
Date
Particulars
Jan-92 To Cash a/c
Dec-92 To Cash a/c
To Balance c/d
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Amount
50000
75000
266250
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391250
Dec-93 To Cash a/c
To Balance c/d
75000
204560
391250
Jan-93 By Bal b/d
Dec-93 By Interest a/c
(5% on 266250)
266250
13310
279560
Dec-94 To Cash a/c
To Balance c/d
75000
139790
279560
Jan-94 By Bal b/d
Dec-94 By Interest a/c
(5% on 204560)
204560
10230
214790
Dec-95 To Cash a/c
To Balance c/d
75000
71780
214790
Jan-95 By Bal b/d
Dec-95 By Interest a/c
(5% on 204560)
139790
6990
146780
Dec-96 To Cash a/c
75000
146780
Jan-96 By Bal b/d
Dec-96 By Interest a/c
(5% on 204560)
71780
3220
75000
75000
Interest Account
Date
Particulars
Dec-92 To B ltd
Amount
16250
Date
Particulars
Dec-92 By P&L a/c
Amount
16250
Dec-93 To B ltd
13310
Dec-93 By P&L a/c
13310
Dec-94 To B ltd
10230
Dec-94 By P&L a/c
10230
Dec-95 To B ltd
6990
Dec-95 By P&L a/c
6990
Dec-96 To B ltd
3220
Dec-96 By P&L a/c
3220
Balance Sheet
Liabilities
Amount
Assets
Trucks on Hire
Purchase
Less: Depreciation
Amount
375000
37500
337500
Less: Due to B Ltd
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266250
71250
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Books of A (Second Method)
Date
Particulars
Jan-92 To Cash
Dec-92 To Cash
Amount
50000
58750
Date
Particulars
Dec-92 By Depreciation
(10% on 375000)
By Bal c/d
Amount
37500
Dec-93 By Depreciation
(10% on 337500)
By Bal c/d
33750
108750
Jan-93 To Bal b/d
Dec-93 To Cash
71250
61690
132940
Jan-94 To Bal b/d
Dec-94 To Cash
99190
64770
Dec-94 By Depreciation
(10% on 303800)
By Bal c/d
163960
Jan-95 To Bal b/d
Dec-95 To Cash
133580
68010
Dec-95 By Depreciation
(10% on 273400)
By Bal c/d
201590
Jan-96 To Bal b/d
Dec-96 To Cash
174250
71780
Dec-96 By Depreciation
(10% on 246000)
By Bal c/d
246030
71250
108750
99190
132940
30380
133580
163960
27340
174250
201590
24600
221430
246030
Interest Account
Date
Particulars
Dec-92 To Cash
Amount
16250
Date
Particulars
Dec-92 By P&L a/c
Amount
16250
Dec-93 To Cash
13310
Dec-93 By P&L a/c
13310
Dec-94 To Cash
10230
Dec-94 By P&L a/c
10230
Dec-95 To Cash
6990
Dec-95 By P&L a/c
6990
Dec-96 To Cash
3220
Dec-96 By P&L a/c
3220
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Balance Sheet
Liabilities Amount
Assets
Trucks on Hire Purchase
Less: Depreciation
Amount
108750
37500
71250
Books of B LTd
Date
Particulars
Jan-92 To Sales a/C
Dec-92 To Interest a/c
Amount
375000
16250
Date
Particulars
Jan-92 By Cash
Dec-92 By Cash
By Bal c/d
391250
Amount
50000
75000
266250
391250
Jan-93 To Bal b/d
Dec-93 To Interest a/c
266250
13310
279560
Dec-93 By Cash a/c
Dec-93 By Balance c/d
75000
204560
279560
Jan-94 To Bal b/d
Dec-94 To Interest a/c
204560
10230
214790
Dec-94 By Cash a/c
Dec-94 By Balance c/d
75000
139790
214790
Jan-95 To Bal b/d
Dec-95 To Interest a/c
139790
6990
146780
Dec-95 By Cash a/c
Dec-95 By Balance c/d
75000
71780
146780
Jan-96 To Bal b/d
Dec-96 To Interest a/c
71780
3220
75000
Dec-96 By Cash a/c
75000
75000
Sales Account
Date
Particulars
Dec-92 To Trading a/c
Amount
Date
Particulars
375000
Jan-92 By A ltd
Interest Account
Amount
375000
Date
Particulars
Dec-92 To P&L a/c
Amount
16250
Amount
16250
Dec-93 To P&L a/c
13310
Dec-93 By A Ltd
13310
Dec-94 To P&L a/c
10230
Dec-94 By A Ltd
10230
Dec-95 To P&L a/c
6990
Dec-95 By A Ltd
6990
Dec-96 To P&L a/c
3220
Dec-96 By A Ltd
3220
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Date
Particulars
Dec-92 By A Ltd
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