Original Hire Purchase

8/6/2019 Original Hire Purchase

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Presentation by

-C.Dinesh.


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Hire Purchasey Hire purchase is used to buy expensive items which a

person cannot afford to pay outright: e.g. a car

yA down payment is usually paid and the balance ispaid over several months (monthly instalments).


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DEFINITIONy Goods are let out on finance by a finance company to

the hire purchase customer

y Buyer is required to pay an equal amount of periodicinstallments during a given period

y Ownership transfers at the payment of the lastinstallment


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Hire purchase - definitionAn agreement under which goods are let on hire andunder which the hirer has an option to purchase them

in accordance with the terms of the agreement.


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What is hire purchase ?y Here possession of goods is transferred immediately,

but payment is made in installments. Ownership is

transferred after all the installments have been paid.


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characteristicsyPossessionyOwnership upon the full

paymentyInstallment buyingySocial innovationyExpands economyyAdditional income


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Terms of hire purchaseIn hire purchase, the purchaser has to follow theagreement and he cannot terminate the contract. The

seller can however, terminate the agreement in case ofdefault of purchaser. Hire purchase price is higherthan cash price, because interest element is added inthis price


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Eligibility to enter into HP transactions

y People with a regular and stable income, and capacity topay installments from the current income

y The person must be competent to enter into a contract .Minor is not eligible

y Foreigners and people not having permanent residence inthe country are disqualified for availing such forms of

credit sales.


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Advantages & disadvantagesy No immediate cash

y Easy possession

y

Economic growthy Relief to buyer

y Reputed buyers

y May lead to bankruptcy

y

Buyer has to mortgage hisproperty

y Buyer may incur loss

y May lose paid installments

in the event of defaulty It is expensive

y Loss to seller in the eventof default by the buyer.


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Process of Hire Purchasey The Dealer, contracts with finance co. for financing his hire

purchase deals.y The customer selects the goods forHP, and dealer arranges for

the complete set of documents.y Down payment by customer on completion of proposal form.y Dealer sends documents to finance co. with request to purchase

the goods, and accept theHP transaction.y The finance co. signs the agreement and sends copy along with

EMI details to dealer.y Dealer delivers the goods to the customer, property passes on to

the finance co..y Hirer pays EMIs, and on last payment , the ownership passes on

to him, with loan completion certificate by the finance co.


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Many kinds of business asset are suitable for

financing using hire purchase including:

y - Plant and machinery

y - Business cars

y - Commercial vehiclesy - Agricultural equipment..

y - Hotel equipment

y - Medical and dental equipment

y - Computers, including software packages

y -Office equipment


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Consumer Credity Includes all asset based financing plans offered to

individuals. (eg. Cars, scooters,VCRs, TVs,Refrigerators, washing machines etc., personalcomputers.)

y Main supplier of consumer credit are MultinationalBanks, commercial banks, Finance companies..etc


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Accounting entries


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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 credit


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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 INTERESThire purchaser debit

to interest on hire purchase sale a/c credit


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What is repossession ?y If hire purchaser doesnt pay instalments, the

vendor will take repossession of the assets.

y There are two types of repossession :

1. full repossession

2. partial repossession


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What is the entry in the books ofpurchaser 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 ofvendor 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 inthe 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 willremain open and the account will show balance

for remaining assets


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THANK U!!!

Documents

Original Hire Purchase