Hire Purchase and Instalment Purchase

system

Introduction

There are different ways by which goods can be sold that is possession and as well ownership of goods will be passed form the seller to the purchaser. Goods can be sold for cash as well as for credit. Another way of selling goods is either on instalment purchase system or hire purchase system.

Instalment purchase system :The possession and ownership of goods

immediately passes from the seller to the buyer but the payment of the total price will be made in the instalments.

Hire Purchase :The buyer acquires the possession of the goods

immediately and agrees to pay the total hire purchase price in Instalments.

Terms Used in Hire Purchase Transactions

• Hire Purchaser or hirer: He is the buyer of the goods.• Hire Vendor: He is the seller of the goods.• Cash price : It is the price on which purchaser can

buy goods for cash.• Hire Purchase Price: It is the total amount which the

Hire Purchaser is required to pay to the hire vendor.• Down Payment: It is the price which is paid by the

hire purchaser to the vendor at the time of agreement.

• Interest : It is the cost of borrowed funds to the asset.

• Instalments: These are convenient amounts in which the hire purchase price is split.

• Instalments Due: These are instalments which are due in the accounting period but not paid by the hire purchaser.

Hire Purchase Instalment Purchase

It is an agreement of hiring It is an agreement of sale

The parties to contract are called hire purchaser and Hire vendor

The parties to contact are called buyers and sellers.

Only the possession of the goods is transferred not the ownership

The ownership of the goods passes from seller to the buyer immediately at the time of sale

The buyer can return the goods to the vendor if he does not want to pay the rest of instalments.

The buyer can’t escape the liability for the payment of future instalments by returning the goods.

The buyer can’t hire out, sell,transfer,destroy or damage the goods.

As the buyer becomes the owner of the goods he can dispose the goods in any manner as he likes.

Hire Vendors book• For the opening stock of goods. Hire purchase trading A/C Dr. To Hire purchase stock account • For Instalment due from Hire Purchase customersHire purchase trading A/c Dr. To instalment Due • For the goods sold on Hire purchase basisHire purchase trading A/c Dr

To goods sold on Hire purchase A/C

• For cash received Bank A/c Dr ToHire

Purchase trading A/C • For repossession of goods due to non payment of instalmentGoods repossessed A/C Dr

To hire purchase trading A/C• For closing stock of goods lying with customersHire purchase stock A/c Dr

To Hire Purchase trading A/C • For Instalments due from hire purchase customer at end of the

year Instalments due A/C Dr

To Hire Purchase trading A/C

• For loading of opening stock with customersStock Reserve A/C Dr

To Hire Purchase trading A/C • For loading of Closing Stock with customers Hire Purchase trading A/C Dr

To Stock reserve A/C• For loading of Goods on Hire PurchaseGoods sold on Hire Purchase A/C Dr

To Hire Purchase trading A/C

• For profit or Loss on Hire purchase transactionProfitHire Purchase A/C Dr To P/L A/CLossP/L A/C Dr

To Hire Purchase trading A/C

Hire Purchase Trading A/cParticulars Rs Particulars Rs

To Opening Balances -Hire Purchase stock - Hire Purchase Debtors

****** By Bank/Cash *******

To goods sold on Hire Purchase ****** By Goods Repossessed A/C *******

To Stock reserve A/c ***** By closing balances - Hire Purchase Stock - Hire purchase Debtor

*****

To profit and Loss A/C ****** By stock reserve A/C *****

By goods sold on hire purchase *****

By profit and Loss A/C *****

Stock And Debtors MethodUnder this method following six accounts are

prepared:• Hire Purchase Stock Account• Hire Purchase Debtor Account• Shop Stock Account• Hire Purchase Adjustment Account• Goods sold on Hire Purchase Account• Goods Repossessed Account

ExampleQuestionHarish sells goods on Hire purchase at cost plus 50% , from the following

particulars relating to the hire purchase department for the year ending 31st dec 2009, prepare H.P A/C and Stock reserve account.

Jan1 Stock with Hire Purchase customer at selling price Rs 4500.Jan1 Stock at shop at cost Rs 9,000Jan1 Instalment due Rs 2,500Jan1 Cash received from customers Rs30,000.Dec31 Goods purchased during the year Rs30,000.Dec31 Goods repossessed (Instalments due Rs 1000 ) Valued at Rs250.Dec31 Hire Expenses Rs250Dec31 Instalment due customer’s paying 4,500.Dec31 Stock at shop at cost (Excluding repossessed goods) Rs10,000.

SolutionHire Purchase stock A/C

Particulars RS Particulars Rs

To Balance b/d 4,500 By H.P. Debtors A/c 33,000

To goods sold on H.P. A/c Cost 29,000 Profit 14,500 43,500

By balance c/d (b.f.) 15,000

-------------------48,000--------------------------------------

-------------------48,000----------------------------------------

Hire Purchase Debtor A/CParticulars RS Particular Rs

To balance b/d 25,00 By Cash 30,000

To Hire purchase stock A/C (b.f.)

33,000 By goods repossessed A/C 250

By H.P. Adjustment A/C 750

To balance c/d 4,500

-------------------35,500--------------------------------------

------------------35,500------------------------------------

Shop Stock A/cParticulars RS Particulars Rs

To Balance b/d 9,000 By cost of goods sold on H.P. (b.f.) 29,000

To Purchases A/c 30,000 By balance c/d 10,000

------------------39,000______________________

_____________39,000________________________

HP Adjustment A/cParticulars RS Particulars Rs

To stock reserve A/c(( 50/150)*15000)

5,000 By stock reserve A/c((50/150)*4500)

1,500

To hire purchase debtors 750 By good sold on H.P. A/c((50/150)*43500)

14,500

To hire expenses 250

To profit and loss Account 10,000

-----------------16,000___________________

___________16,000______________________

Good sold on H.P. A/CParticulars Rs Particulars Rs

To H.P. adjustment A/c 14,500 By HP stock A/c` 43,500

To Trading A/c 29,000

__________________43,500_________________________________

__________________43,500_________________________________

Stock Reserve AccountParticulars Rs Particulars Rs

To H.P. adjustment A/c 1,500 By balance b/d 1,500

To balance c/d _________5,000__________________

By H.P. adjustment A/c _________5,000__________________

HP Trading AccountParticulars Rs Particulars Rs

To stock with customers 4,500 By cash a/c 30,000

To instalments due 2,500 By goods repossessed a/c 250

To goods sold on H.P. a/c 43,500 By HP stock a/c 15,000

To stock reserve a/c 5,000 By instalment due a/c 4,500

To hire expenses 250 By stock reserve a/c 1,500

To net profit 10,000 By good sold on H.P. a/c 14,500

___________65,750______________________

_________65,750____________________

Thank You