Business Accounting

In the Purchaser’s Books:

• Goods on hire purchase are treated as Assets upon receipt. The cash price is recorded as Cost of Assets re: Fixed Assets and
• The interests on hire purchase are charge to the Profit & Loss account as revenue expenditure over the period of the Hire Purchase Agreement

Accounts Required in The Purchaser’s Books:

a.Asset Account

b.Hire Purchaser Company Vendor A/c

c.Hire Purchase Interest Suspense Account

Double entries:

(a) Debit :Asset Account

Credit: Hire Purchaser Company Vendor A/c

[ with the cash price of asset ]

(b) Debit: HP Interest Suspense A/c

Credit: Hire Purchaser Company Vendor A/c

[ with the total hire purchase interest ]

(c) Debit :HP Company Vendor a/c

Credit: Bank A/c

[ payment of deposit and installment paid ]

(d) Debit : Profit & Loss a/c

Credit: HP Interest Suspense A/c

[ interest written off in the period ]

Various Accounts Items

1.  Asset Account

• records the cash price of the goods and separate asset accounts in respect of cost, depreciation and disposal are maintained.
• Depreciation is computed on the full amount of the cash price
• In Balance Sheet, asset will appear at cost less provision for depreciation.

2.  Hire Purchase Company Vendor A/c

• Shows amount payable payable under the hp agreement for both cash price plus hp interest.
• Balance represent all unpaid installments
• In the Balance sheet, the amount outstanding at the end of the account period shown as Current liability.

3.  Hire Purchase Interest Suspense A/c

• Shows interest included in the balance on the HP Company vendor a/c.
• Interest apportioned to any accounting period is charged to the profit & loss a/c.
• Balance represent interest needed to be apportioned to later accounting period
• In the Balance sheet, the amount of hp interest suspense a/c must be deducted from the balance in the HP Company vendor a/c and shown as Current liability

Features of Hire Purchase

When goods are purchased under a Hire Purchase Agreement:

• Vendor of the goods leases the asset to the purchaser on the terms that the purchaser shall pay to the vendor hire charges equivalent to the cash purchase price plus interest on the outstanding balance.
• The legal title to the assets does not pass to the purchaser until he has paid his final installment and exercise his option to purchase
• On default of payment, the vendor can reclaim/repossess the asset subject to certain clauses of the Hire Purchase Acts 

Credit Sales Agreement :-

Here, the legal title of the goods passes to the purchaser immediately on delivery and the purchase price is payable by installments. In the eve

Rental Agreement:-

The legal title to the goods remains with the vendor and for as long as the customer possess the goods, he has to pay a rental charge.