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HIRE PURCHASE SYSTEM

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UNIT 3

e.
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MEANING
When goods are sold on credit, for which

in
payment is made by the buyer in

e.
installments over a period of time.

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It is called Hire Purchase System.

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FEATURES
Hire Purchase is an agreement between two parties called Hire

in
1.
Vendor & Hire purchaser

e.
2. The agreement provides for parting the possession of goods, by
the seller, with an option to purchase or hire the goods by buyer

at
3. Payment for the goods will be made by the hire purchaser in
installments

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4. If the hire purchaser pays all the installments, the ownership of
the goods will be transferred on payment of last installment,
resulting the transaction in ‘purchase’
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5. If hire purchaser stops paying the installments, the hire vendor
repossesses the goods resulting the transaction in ‘hire’. In such
case, each earlier installment paid will be treated as hire charges
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6. In case the transaction resulting in purchase, each installment
paid will be inclusive of:
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a. Payment towards price of the goods (i.e., principal amount) &

b. Payment of interest

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INSTALLMENT PURCHASE SYSTEM

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e.
at
ym
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Bu

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MEANING

in
Installment payment system (also called as

e.
Deferred installments) is a payment where

at
the buyer is given the ownership as well as

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the possession of the goods at the time of
signing the contract. The buyer has the
ud
facility to pay the price in installments.
st
Bu

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DEFINITION

in
According to J.R. Batliboi

e.
“Installment Purchase System is a system

at
under which there is an agreement to

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purchase & pay by installments, the goods
which become the property of the
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Purchaser immediately when he receives
the delivery of the same”.
st
Bu

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FEATURES
Under this system, there will be an outright sale

in
1.
of goods/assets

e.
2. The possession as well as the ownership is
passed on to the buyer right at the time of

at
signing the contract

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3. The buyer can make the payment in installments
4. In case of default in payment, the seller cannot
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reposses the goods, but he can sue the buyer
for the recovery of unpaid price
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5. The buyer cannot exercise the option of
returning the goods & terminate the contract,
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unless the same becomes void or voidable

under the contract act.
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DIFFERENCE BETWEEN HIREPURCHASE

AND INSTALLMENT SYSTEM

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DIFFERENCES BETWEEN SALE &
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HIRE PURCHASE

in
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 Important terms under
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Hire Purchase

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1) Hire Purchaser

e.
2) Hire vendor
3) Cash price

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4) Hire Purchase price

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5) Installment money
6) Deposit:
ud
7) Net Cash price
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8) Net Hire purchase price
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9) Hire purchase charges

10) Statutory Hire Purchase charges
11) Hire Purchase agreement
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CONTENTS
 Date of Agreement
 Details of Seller

in
 Details of Purchaser

e.
 Date and period of let out

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 Name, type and model of the

ym
asset
ud  Details of Installment expenses
 Cash Price
 Hire Purchase Price
st

 Payment Details
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 Authority of Inspection
 Consequences of Default
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 Termination of Hire Purchase
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Agreement

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 Hirer can terminate the agreement at any point
of time giving 14 days notice to the owner.

e.
Additional charges may be imposed to hirer.

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
Hirer need not pay this additional charge if he has

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
already paid more than half of the amount due by
him before termination of agreement.
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 On termination, the hirer has to deliver or
st
tender goods to owner.
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 The owner will have right to retain the amount

already received & to recover the arrears of hire
due. Follow Us on instagram @bustudymate for Important Questions
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Differences between
Agreement to Sell
&

in
e.
Hire Purchase Agreement

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 INFORMATION REQUIRED FOR
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HIRE PURCHASE ACCOUNTING

 Date of purchase and down payment

in
 Date at which the installments become due

e.
 Date of closure of accounts

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 Total cash price

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 Amount of each installment
 Rate of interest
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 Rate of depreciation
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 Hire purchase price
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 Method of depreciation
 Cash price in each installment
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e.
at
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Bu

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METHODS

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e.
Asset Accrual
Method

at
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Outright
Property Method
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Interest Suspense
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Method

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 Asset Accrual Method
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1. When the asset is purchased

No Entry
2. When the down payment is made
Asset A/c Dr.

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To Bank A/c

e.
3. When the installment becomes due
Asset A/c Dr.

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(with cash price part of installment)
Interest A/c Dr.

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(interest on installment)
To Hire vendor A/c
4. When installment is paid
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Hire Vendor A/c Dr.
To Bank A/c
st
5. When depreciation is charged
Depreciation A/c Dr.
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To Asset A/c
6. When interest and depreciation accounts are closed by transfer to P/L A/c.
P/L A/c Dr.
To interest A/c
To Depreciation
Follow A/c
Us on instagram @bustudymate for Important Questions
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in
e.
at
ym
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 JOURNAL ENTRIES
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1. When the item is sold on hire purchase basis:

Hire Purchaser’s A/c Dr.

in
To Sales A/c

e.
(With the cash price only)
2. When the down payment is received

at
Bank A/c Dr.

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To Hire Purchaser’s A/c
3. When the interest becomes due
Hire Purchaser’s A/c
ud Dr.
To interest A/c
4. When the installment is received
st
Bank A/c Dr.
To Hire Purchaser’s A/c
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5. When the interest account is closed by transfer to P/L account

Interest A/c Dr.
To P/L A/c

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STEPS IN HIRE PURCHASE SYSTEM

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A. Ascertainment of Amount of Interest

While calculating interest we may face the

in
following two situations:

e.
at
When rate of
interest, total cash When hire purchase

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price is “Inclusive” of
price and interest (i.e. HP>CP)
installments are
Ascertainment
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of Amount of
Interest When total cash
st
price and
installments are When hire purchase
price is “Exclusive” of
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given, but rate of interest (i.e. HP=CP)

interest is not
given

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When rate of interest, total cash price and
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installments are given.

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When total cash price and installments are given,
but rate of interest is not given

STEPS TO CALCULATE INTEREST

in
e.
I. Calculate the total interest by subtracting

at
the total cash price from the total hire

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purchase price
II. Calculate the amounts of hire purchase
outstanding at the beginning of each year
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after subtracting the down payment.
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III. Find out the ratio of outstanding amounts
calculated in Step II.
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IV. Apply this ratio to the total interest and

calculate the interest of each installment.
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B. Ascertainment of Total Cash Price
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WITHOUT WITH
ANNUITY ANNUITY

e.
TABLE TABLE

at
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Case 1- When
ud Installment is
constant
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Case 1I- When

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Installment is
varying
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 WITHOUT ANNUITY TABLE
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 Under this method interest is calculated

e.
starting with the last installment

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 Interest is to be calculated on the

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outstanding amount of cash price.
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Formula to calculate Interest
st
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WITH ANNUITY TABLE

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 In the annuity table the rate of interest is

e.
given in the rows and the years in the

at
columns.

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 With reference to the table, the present
value of each installment can be calculated.
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 The sum of these present values as
st

calculated, if added to the cash down

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payment, would give the cash price.

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