HIRE PURCHASEPrepared By:

Jigar DhuvadClick to edit Master subtitle style

Hire PurchaseHire purchase is used to buy expensive items which a person cannot afford to pay outright: e.g. a car A down payment is usually paid and the balance is paid over several months (monthly instalments).

DEFINITION

Goods are let out on finance by a finance company to the hire purchaser customer Buyer is required to pay an equal amount of periodic installments during a given period Ownership transfers at the payment of the last installment

Hire purchase - definition An agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement.

What is hire purchase ?

Here possession of goods is transferred immediately, but payment is made in instalments. Ownership is transferred after all the instalments have been paid.

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Terms of hire purchaseIn hire purchase the purchase has to follow the agreement and he cannot terminate the contract. The seller can however, terminate the agreement in case of default of purchaser hire purchase price is higher than cash price, because interest element is added in this price7/21/11

A purchases a machine for down payment of Rs. 20000 and 3 annual instalments of 20000 each. Cash price is 74500. show the accounting ? Rate of interest 5%74500 20000 = 54500 interest = 2725 amount due : 57225 2nd instalement 20000 amount due : 37225 interest = 1861 due = 39086 3rd instalment : 20000, balance : 19086 interst (belancing amt) : 914 last instalment 20000 balance = nil7/21/11

Process of Hire Purchase

The Dealer, contracts with finance co. for financing his hire purchase deals. The customer selects the goods for HP, and dealer arranges for the complete set of documents. Down payment by customer on completion of proposal form. Dealer sends documents to finance co. with request to purchase the goods, and accept the HP transaction. The finance co. signs the agreement and sends copy along with EMI details to dealer. Dealer delivers the goods to the customer, property passes on to the finance co.. Hirer pays EMIs, and on last payment , the ownership passes on to him, with loan completion certificate by the finance co.

Hire purchase vs leasing The hire has the option to purchase the goods Is a method of financing business assets & consumer articles Depreciation & investment allowance can be claimed In leasing the lessee has no option to buy the goods Is a method of financing business assets only

Depreciation & investment allowance cannot be claimed Only the interest is tax Entire lease rental is tax component deductible deductible Hirer enjoys the salvage value of Lessee does not enjoy the the asset salvage value of the asset

20-25% deposit is required in hire purchase In hire purchase we purchase the goods The extent of finance is not 100% because of down payment Hirer bears the cost of maintenance Asset is shown in b/s of the hirer

No deposit is required in leasing In leasing we rent the goods The extent of finance is 100% as no down payment required Maintenance cost is borne by the lessor except in finance lease Leased assets are shown by way of foot note only

Hire purchase

LEASING IN INDIA

Present industry orderOnly few major players exist SREI International Finance Sundaram Finance Cholamandalam Finance Mahindra & Mahindra GE Capital Shriram Finance Tata Finance Countrywide Finance Citicorp

Many kinds of business asset are suitable for

financing using hire purchase or leasing, including: - Plant and machinery - Business cars - Commercial vehicles - Agricultural equipment.. - Hotel equipment - Medical and dental equipment - Computers, including software packages -Office equipment

GUIDELINES FOR BANKS AS FAR AS HIRE PURCHASE BUSINESS IS CONCERNEDdirectly (i.e, departmentally) the business of hire purchase

I.

For the present, banks shall not themselves undertake

II.

Banks which have set up subsidiaries (i.e, a company in which it holds not less than 51% of the shares ) for the business of equipment , leasing ,merchant banking etc, may undertake the hire purchase business either through such a subsidiary or through a separate subsidiary.

Consumer Credit

Includes all asset based financing plans offered to individuals. (eg. Cars, scooters,VCRs, TVs, Refrigerators, washing machines etc., personal computers.). Main supplier of consumer credit are Multinational Banks, commercial banks, Finance cos..etc

Consumer Credit...Salient Features

Parties to the transaction : Bipartite arrangement - two parties viz borrower/consumer and dealer/financier. Tripartite Transaction - dealer, financier, and customer. The dealer arranges the credit from the financier. Structure of the transaction : Hire-Purchase , Conditional Sale , Credit Sale . Hire Purchase - Most tripartite consumer credit transactions are of this type. Customer option to purchase the asset on completion of the pay back period.

Consumer Credit ...

Conditional Sale : Ownership not transferred until full payment of purchase price, including the credit charge. The customer cannot terminate the agreement. Credit Sale : Ownership transferred to the customer on first instalment payment. But the agreement cannot be cancelled. Payment Period and ROI : Payment period - 12 -60 months. ROI - generally flat rate. Effective Rates generally not disclosed. Sometimes in place of ROI, the EMI for different payment periods is mentioned.

Consumer Credit ...

Security : First charge on assets. The consumer cannot sell the hypothecated asset. Evaluation Can be made with Effective Rate of Interest and rebates for early repayments.

What entry is made on purchase of an asset on hire purchase ?Asset on hire purchase debit to hire purchase vendor a/c credit (with the cash price of assets)

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What entry is made on payment of an asset purchased on hire purchase ?Hire vendor ac debit to bank

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What entry is made on payment of an asset purchased on hire purchase ?Interest on hire purchase debit to hire vendor a/c credit

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What entry is made about depreciation of an asset purchased on hire purchase ?Depreciation on asset a/c debit to asset account credit SECOND ENTRY p & l a/c debit to depreciation credit7/21/11

What entry is made in the books of vendor on hire purchase sale ?Hire purchaser a/cdebit to hire purchase sale a/c credit (with the cash price of goods) WHEN PAYMENT IS RECEIVED bank a /c debit to hire purchaser a/c credit FOR INTEREST hire purchaser debit to interest on hire purchase sale a/c credit7/21/11

What is repossession ?If hire purchaser doesnt pay instalments, the vendor will take repossession of the assets. There are two types of repossession : 1. full repossession 2. partial repossession7/21/11

What is the entry in the books of purchaser on full repossession ?Hire ventor a/c debit to asset a/c (from the value of asset as per accounts)

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What is the entry in the books of vendor on full repossession ?Goods repossession a/c debit to hire purchaser account credit (a new account of goods repossession will be opened)

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What is the accounting entry in the case of partial repossession ?In the case of full repossession, the hire purchaser will close the account of ventor and vendor will close the account of purchaser. But in case of partial repossession, the accouts will remain open and the account will show balance for remaining assets7/21/11

THANK YOU

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