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 customers Hire purchase trading A/c Dr. To instalment Due For the goods sold on Hire purchase basis Hire 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 instalment Goods repossessed A/C Dr To hire purchase trading A/C For closing stock of goods lying with customers Hire 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

For loading of opening stock with customers Stock 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 Purchase Goods sold on Hire Purchase A/C Dr

For profit or Loss on Hire purchase transaction Hire Purchase A/C Dr To P/L A/C Loss P/L A/C Dr To Hire Purchase trading A/C  

Hire Purchase Trading A/c 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 Method Under 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

Example Question Harish 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 9,000 Jan1 Instalment due Rs 2,500 Jan1 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 Rs250 Dec31 Instalment due customer’s paying 4,500. Dec31 Stock at shop at cost (Excluding repossessed goods) Rs10,000.

Solution Hire Purchase stock A/C Particulars RS 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 -------------------------------------- --------------------

Hire Purchase Debtor A/C Particulars 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 ------------------

Shop Stock A/c Particulars RS 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 ______________________ _____________ ____________

HP Adjustment A/c Particulars RS 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 ___________________ ___________ ______________________

Good sold on H.P. A/C Particulars Rs To H.P. adjustment A/c 14,500 By HP stock A/c` 43,500 To Trading A/c 29,000 __________________ ________________ _________________

Stock Reserve Account Particulars Rs To H.P. adjustment A/c 1,500 By balance b/d To balance c/d _________5,000 __________________ By H.P. adjustment A/c _________ 5,000

HP Trading Account 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 To hire expenses 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