Accounting for Hire Purchase

Hire purchase is an agreement between two parties in which one party purchase any asset from other party. Because he has no money to pay, so he pays per month hire charges. Vendor has the possession of asset. When buyer pays total price of assets in the form of hire charges, then asset is transferred to its purchaser. Vendor may also transfer asset before last payment of installment on his own risk. If buyer will become defaulter, vendor has right to get his asset from hire purchaser.

Accounting Methods for Hire Purchase Transaction

For accounting point of view both hire purchase and instalment payment system are same. Before accounting, we should know following things

a) Cash price is that price which will be paid if any asset is purchased on cash without installment.

b) Hire price = cash price + interest for risk of giving asset on instalment.

c) Down payment = Payment at the beginning of deal of hire purchase.
There are four methods of accounting for hire purchase.

1st Method : Cash Price Method

Under cash price method, we are deal hire purchase transactions just like normal transactions. When transactions or event happen, we record them.

Journal Entries in the books of Purchaser

a) For buying assets on hire purchase

Asset on hire purchase account Dr.

Vendor account Cr.

b) For paying the down payment to vendor

Vendor account Dr

Cash/ bank

c) When Interest is Due on unpaid installments

Interest on Hire Purchase account Dr.

Vendor Account Cr.

d) For Instalment Payment ( Interest payment will be also included in it)

Vendor Account Dr

Cash / Bank account Cr

e) For transferring interest to profit and loss account

Profit and Loss account Dr.

Interest on hire purchase account Cr.

f) For depreciation charge

Depreciation account Dr.

Assets on hire purchase account Dr.

g) If Asset is returned

Hire Vendor account Dr.

Asset on hire purchase account Cr.

In the books of Hire