Hire purchase system default and repossession

Accounting for Hire Purchase Transactions

1. Hire Purchase System Default and Repossession Mahesh Chandra Sharma Associate Professor Department of Commerce Shaheed Bhagat Singh Eve. College (University of Delhi) India

2. Hire Purchase System - Features Under the hire purchase system goods are sold on instalment basis. Ownership of the goods is transferred when the last instalment is paid. If the hire purchaser becomes defaulter, the hire vendor has the right to take away the goods and forfeit the instalments received as hire charges for the use of goods.

3. Important Terms Hire Purchaser or Hirer The person/firm is called hire purchaser, who obtains or has obtained possession of goods from an owner under a Hire Purchase Agreement. Owner or Hire Vendor The person/firm is called hire vendor, who delivers or has delivered goods to a hirer under Hire Purchase Agreement. Deposit or Initial Payment or Down Payment The amount paid by the hirer to the owner at the time of taking possession of the goods.

4. Important Terms (Contd.) Hire Charges Hire charges is the amount payable periodically by the hire purchaser under a Hire Purchase A greement. Cost Price It is cost of goods to the Hire Vendor. Cash Price It is the price at which goods is sold on cash basis. It includes Cost Price plus profit margin.

5. Important Terms (Contd.) Hire Purchase Price It is the price at which Hire Vendor sells goods to Hire Purchasers on hire purchase basis. Hire Purchase Charges or Interest It is the difference between Hire Purchase Price and Cash Price. Total Interest = HPP – Cash Price

6. Accounting for Hire Purchase Transactions

7. Asset Full Value Method Under this method, goods purchased/sold are treated as ordinary purchase/sale. In the books of hirer, goods purchased are debited to Asset A/c (being capital goods) and credited to Hire Vendor’s A/c with full cash price of the asset. In the books of hire vendor, goods sold are debited to Hire Purchaser’s A/c and credited to Hire Sales A/c with full cash price of the asset.

8. Asset Accrual Method Under this method, goods purchased/sold are not treated as ordinary purchase/sale. Entries are passed only with the amount of down payment and instalments, whenever they become due. In the books of hire purchaser, Asset A/c (being capital goods) is debited only with cash price included in the each instalment and Interested A/c is debited with the interest included in the instalment and the total amount of instalment is credited to Hire Vendor’s A/c. Note: In practice, the asset Full Value Method is commonly used.

9. Asset Full Value Method: Journal Entries in the Books of Hire Purchaser Date Particulars Amt. (Dr.) Amt. (Cr.) First Year (1) For Purchases of asset (Total cash price of the goods) – on the date of purchase Asset A/c Dr. Xx To Hire Vendor’s A/c X x (2) For making down payment Hire Vendor’s A/c Dr. Xx To Bank A/c Xx

10. Journal Entries in the Books of Hire Purchaser Date Particulars Amt. (Dr.) Amt. (Cr.) First Year (3) When Instalment becomes due – for interest Interest Paid A/c Dr. Xx To Hire Vendor’s A/c X x (4) For payment of instalment Hire Vendor’s A/c Dr. Xx To Bank A/c Xx Note: Whenever instalment becomes due, above entries are repeated.

11. Journal Entries in the Books of Hire Purchaser Date Particulars Amt. (Dr.) Amt. (Cr.) First Year At the end of the accounting year (5) For Depreciation Depreciation A/c Dr. Xx To Asset A/c X x (6) For Closing Interest paid A/c and Depreciation A/c Profit and Loss A/c Dr. Xx To Interested Paid A/c Xx To Depreciation A/c Xx Notes: Entries (3) to (6) are repeated every year.

12. Ledger Accounts in the Books of Hire Purchaser Hire Vendor’s A/c Asset A/c Interest Paid A/c Depreciation A/c

13. Asset Full Value Method: Journal Entries in the Books of Hire Vendor Date Particulars Amt. (Dr.) Amt. (Cr.) First Year (1) For sale of goods on hire purchase basis (Total cash price of the goods) – on the date of sale Hire Purchaser’s A/c Dr. Xx To Hire Sales A/c X x (2) For receiving down payment Bank A/c Dr. Xx To Hire Purchaser’s A/c Xx

14. Journal Entries in the Books of Hire Vendor Date Particulars Amt. (Dr.) Amt. (Cr.) First Year (3) When Instalment becomes due – for interest Hire Purchaser’s A/c Dr. Xx To Interest Received A/c X x (4) For receiving instalment Bank A/c Dr. Xx To Hire Purchaser’s A/c Xx Note: Whenever instalment becomes due, above entries are repeated.

15. Journal Entries in the Books of Hire Vendor Date Particulars Amt. (Dr.) Amt. (Cr.) First Year At the end of the accounting year (5) For Closing Interest Received A/c Interest Received A/c Dr. Xx To Profit and Loss A/c Xx Notes: Entries (3) to (5) are repeated every year.

16. Ledger Accounts in the Books of Hire Vendor Hire Purchaser’s A/c Interest Received A/c

17. Full Repossession Journal Entries in the Books of Hire Purchaser Date Particulars Amt. (Dr.) Amt. (Cr.) (1) For Goods repossessed on default of instalments – for amount of balance shown in the HV’s A/c Hire Vendor’s A/c Dr. Xx To Asset A/c Xx (ii) For loss on repossession of asset Profit and Loss Account Dr. Xx To Asset A/c Xx Note: Hire Vendor’s A/c and Asset A/c – both are closed.

18. Full Repossession Journal Entries in the Books of Hire Vendor Date Particulars Amt. (Dr.) Amt. (Cr.) ( i ) For Goods repossessed on default of instalments – for amount of balance shown in the HPs A/c Goods Repossessed A/c Dr. Xx To Hire Purchaser’s A/c Xx (ii) For Repairing Expenses paid on Goods Repossessed Goods Repossessed A/c DR. Xx To Bank A/c Xx

19. Journal Entries in the Books of Hire Vendor Date Particulars Amt. (Dr.) Amt. (Cr.) (iii) For sale of Goods Repossessed To Bank A/c DR. Xx To Goods Repossessed A/c Xx (iv) For net profit on sale of Goods Repossessed Goods Repossessed A/c DR. Xx To Profit and Loss A/c Xx Note: In case of Net Loss, the above entry shall be reversed.

20. Goods Repossessed A/c This account is prepared for recording goods repossessed, its valuation, repairs and sale of it . Profit or Loss on sale of Goods Repossessed (Sale Price of GR − Value of GR including repair charges) is transferred to P and L A/c.

21. Partial Repossession of Goods In case of partial repossession, accounting entries are the same as for full repossession. Entry for repossession is passed at the “Transfer Value” of goods repossessed, which is either given or to be calculated as per instruction. Loss on repossession to Hire Purchaser is calculated as Loss on repossession = Book Value of Asset Repossessed − Transfer Value of asset repossessed.

22. Stock and Debtor Method For this method, please see my another presentation on Hire Purchase System Stock and Debtor Method.

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