Hire Purchase and Instalment Purchase system

1. Hire Purchase and Instalment Purchase system

2. 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.

3. 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.

4. 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.

5. 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.

7. 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

8. For cash received Bank A/c DrToHirePurchase 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 To Hire Purchase trading A/C

9. 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 To Hire Purchase trading A/C

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

11. Hire Purchase Trading A/c

12. 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

13. 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 31stdec 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.

14. Solution Hire Purchase stock A/C

15. Hire Purchase Debtor A/C

16. Shop Stock A/c

17. HP Adjustment A/c

18. Good sold on H.P. A/C

19. Stock Reserve Account

20. HP Trading Account

21. Thank You