Hire Purchase SystemDefault and Repossession

Mahesh Chandra SharmaAssociate Professor

Department of CommerceShaheed Bhagat Singh Eve. College

(University of Delhi) India

Hire Purchase System - FeaturesUnder 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.

Important TermsHire 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 VendorThe 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 PaymentThe amount paid by the hirer to the owner at the time of taking possession of the goods.

Important Terms (Contd.)Hire Charges

Hire charges is the amount payable periodically by the hire purchaser under a Hire Purchase Agreement.

Cost PriceIt is cost of goods to the Hire Vendor.

Cash PriceIt is the price at which goods is sold on cash basis. It includes Cost Price plus profit margin.

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 InterestIt is the difference between Hire Purchase Price and Cash Price. Total Interest = HPP – Cash Price

Accounting for Hire Purchase Transactions

Accounting Methods

For Goods of Considerable

Value

Asset Full Value Method

Asset Accrual Method

For Goods of Small Value

Hire Purchase

Trading A/c Method

Stock and Debtors Method

Asset Full Value MethodUnder 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.

Asset Accrual MethodUnder 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.

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 purchaseAsset A/c Dr. Xx

To Hire Vendor’s A/c X x(2) For making down payment

Hire Vendor’s A/cDr.

Xx

To Bank A/c Xx

Journal Entries in the Books of Hire PurchaserDate Particulars Amt.

(Dr.)Amt. (Cr.)

First Year

(3) When Instalment becomes due – for interestInterest Paid A/c

Dr.Xx

To Hire Vendor’s A/c X x

(4) For payment of instalment

Hire Vendor’s A/cDr.

Xx

To Bank A/c Xx

Note: Whenever instalment becomes due, above entries are repeated.

Journal Entries in the Books of Hire PurchaserDate Particulars Amt.

(Dr.)Amt. (Cr.)

First Year

At the end of the accounting year

(5) For Depreciation

Depreciation A/cDr.

Xx

To Asset A/c X x

(6) For Closing Interest paid A/c and Depreciation A/cProfit and Loss A/c Dr. Xx

To Interested Paid A/c Xx

To Depreciation A/c XxNotes:

Entries (3) to (6) are repeated every year.

Ledger Accounts in the Books of Hire Purchaser

Hire Vendor’s A/cAsset A/cInterest Paid A/cDepreciation A/c

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 saleHire Purchaser’s A/c Dr. Xx

To Hire Sales A/c X x(2) For receiving down payment

Bank A/c Dr. XxTo Hire Purchaser’s A/c Xx

Journal Entries in the Books of Hire VendorDate Particulars Amt.

(Dr.)Amt. (Cr.)

First Year

(3) When Instalment becomes due – for interestHire 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.

Journal Entries in the Books of Hire VendorDate 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 XxNotes:

Entries (3) to (5) are repeated every year.

Ledger Accounts in the Books of Hire VendorHire Purchaser’s A/cInterest Received A/c

Default and RepossessionWhen the Hire Purchaser does not pay the instalment, the Hire Vendor may repossess

the goods sold.

Full Repossession

When the whole goods is

repossessed.

Partial Repossession

When only a part of goods sold is

repossessed.

Full RepossessionJournal 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/cHire 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.

Full RepossessionJournal 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/cGoods Repossessed A/c Dr. Xx

To Hire Purchaser’s A/c Xx(ii) For Repairing Expenses paid on Goods

RepossessedGoods Repossessed A/c DR. Xx

To Bank A/c Xx

Journal Entries in the Books of Hire VendorDate Particulars Amt.

(Dr.)Amt. (Cr.)

(iii) For sale of Goods RepossessedTo Bank A/c DR. Xx

To Goods Repossessed A/c Xx(iv) For net profit on sale of Goods

RepossessedGoods Repossessed A/c DR. Xx

To Profit and Loss A/c XxNote:

In case of Net Loss, the above entry shall be reversed.

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.

Partial Repossession of GoodsIn 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.

Stock and Debtor MethodFor this method, please see my another

presentation on Hire Purchase System Stock

and Debtor Method.

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