Hire–Purchase And Installment Payment System -
Accounting Entries:

Hire-Purchase and Installments are methods of financing goods where payments are made in installments. The differences are ownership and repossession of goods.

Hire-Purchase is a special system of purchase and sale of goods. Under this system the hire purchaser pays the price of the goods in instalments. The instalments may be annual, six monthly, quarterly, monthly fortnightly etc.

Under the Hire Purchase System the Hire Purchaser gets possession of the goods at the beginning, but, the title or the ownership of the goods remains with the Hire Vendor until the full and final payment of all the instalments are made by the Hire Purchaser. In case he fails to pay any of the instalments (even the last one) the hire vendor has the right to repossess his goods without compensating the buyer.

The special feature of hire-purchase system is that the payment of every instalments made is treated as the payment of hire charges by the hire purchaser to the hire vendor till the payment of the final instalments is made. After the payment of the last instalments is made, the amount of various instalments paid by the hire purchaser to the hire vendor is appropriated towards the payment of the price of the goods sold and thereby the title or ownership of the goods is transferred to the purchaser.

Meaning And Description Of Installments Payment System:

Instalments Payment System is system of purchase and sale of goods in which the title of goods is immediately transferred to the purchaser at the time of sale of goods and the sale price of the goods is paid in instalments.

In the event of default in payment of any instalments, the seller has no right to take back goods from the possession of the purchaser. He can file a suit for the recovery of the outstanding balance of the price of goods sold.

Advantages Of Hire Purchase System:

Following are the advantages of hire purchase:

  1. It helps consumers to procure costly items conveniently which otherwise cannot be purchased with ease.
  2. It helps to increase the turnover and enhances the profitability of the enterprise by reducing the profit-margins in the competitive atmosphere of retail trade.
  3. It enables the consumers in budgeting for the purchase of expensive capital times out of weekly or monthly earnings.
  4. The Hirer has a right to terminate the agreement at any time before the goods is transferred.
Accounting Treatment Of Hire Purchase Transactions: Assets Accrual Method: First Year:

1. On the date of signing of the contract with down payment (if any):

(i) Assets A/c -----------------------------Dr.

          To Vendor's A/c

(Being the amount payable to the vendor as down payment for purchase of goods)

(ii) Vendor's A/c -----------------------------Dr.

          To Cash/Bank A/c

(Being the amount of down payment paid)

2. At The End Of The Year When The Next Instalment Falls Due:

Assets A/c -----------------------------Dr.

Interest A/c -----------------------------Dr.

          To Vendor's A/c

(Being instalment along with the amount of interest thereon made due)

3. For Making Payment Of The Above Instalment:

Vendor's A/c -----------------------------Dr.

          To Cash/Bank A/c

(Being the amount of Instalment paid)

4. For Charging of Depreciation For The Year:

Depreciation A/c -----------------------------Dr.

          To Assets A/c

(Being depreciation charged for the year)

5. For closing or Transferring The Amount of Depreciation A/c And Interest A/c:

Profit and Loss A/c-----------------------------Dr.

          To Depreciation A/c (with the amount of depreciation)

          To Interest A/c (with the amount of Interest)

(Being the amount of depreciation and interest transferred to Profit and Loss A/c)

Note:

The Entries 2, 3, 4, and 5 will be repeated with their respective amount until the final instalment is paid.