Accounting for Hire Purchase System

Discipline Courses-I

Semester-I

Paper : I

Unit-VII

Lesson: Accounting for Hire Purchase System

Lesson Developer: Shivani

College/Department: Zakirhussain College, University of Delhi

Institute of Lifelong Learning, University of Delhi

 Accounting for Hire Purchase System

Lesson: Accounting for Hire Purchase System

Table of Contents:
1: Learning Outcomes
2: Introduction
3: Hire Purchase System
4: Hire purchase system Vs. Installment system
5: Terms used in Hire purchase Agreement
6: Calculation of Interest
7: Accounting for Hire Purchase
7.1: Cash price method
7.2: Debtor System
7.3: Stock and Debtor System
8: Default and Repossession
8.1: Accounting treatment in case of full repossession
8.2: Accounting treatment in case of partial repossession
9: Hire purchase trading A/C at cost, at selling price/Debtor System
10: Calculation of Missing Figures
11: Stock and Debtor System
12: Lease
Summary
Exercises
References

1. Learning Outcomes:
After you have read this lesson, you should be able to:
 understand hire purchase system and the process,
 differentiate between hire purchase system and the simple
installment system,
 calculate the interest involved in hire purchase system,
 understand the accounting of hire purchase through different
methods used in the real world,
 comprehend the process of repossession of goods and its
accounting,
 differentiate between the concept of hire purchase and lease.

Institute of Lifelong Learning, University of Delhi 2

 Accounting for Hire Purchase System

2. Introduction:
In business one requires different types of resources varying from simple tools to big
machineries, men power, land, finance etc. The tools and machinery and such assets
may be needed for a temporary period or a very long period. One may have adequate
finance to purchase those or may borrow finance for fulfilling the need. But some may
neither have adequate finance nor are in the position of borrowing the sum. What
alternative is left to them?

They can acquire the asset on rent, on credit, on installment or can go for hire purchase.
They simply need to enter into an agreement.

3. Hire Purchase System

Hire purchase system is a method of buying goods or assets in which the purchaser
takes the possession as soon as an initial installment of the price is paid but the
ownership is obtained only after all the agreed number of subsequent installments are
paid. However in case of default, the vendor can take back the possession of goods. It is
also relevant to state that the sums paid by the hire purchaser, prior to the repossession
of goods by the hire vendor, are treated as hire charges for using the property and the
same are never refundable.

The installments include interest and depreciation charges.

A hire purchase agreement differs from a credit-sale agreement and sale by installment
because under these transactions ownership passes on signing the contract.

Figure 1: Parties involved in Hire Purchase

Under this method, the purchaser does not need to spend the entire amount in one go
or borrow a large amount of money,, rather can procure the right for the immediate use
of an asset. It is a financial facility that permits the use of asset in return of regular
payments without transferring the ownership. In addition, the hirer acquires the right to
buy the asset, after the use of an asset for a particular period on paying a small or
nominal amount of money.

Institute of Lifelong Learning, University of Delhi 3

 Accounting for Hire Purchase System

The acquisition of asset, specifically the expensive capital asset, calls for careful financial
planning. There is no point making outright cash payment, but prudent to adopt the
ways of spreading the cost over a period of time to match or coincide with that of
generation of revenue by business. The hire purchase system is believed to be the most
common source of finance for investment in capital assets.

The assets that are suitably financed through this method are like:
 Tools
 Plants and machinery
 Cars
 Commercial vehicles
 Agricultural equipment
 Computers including software packages
 Office equipment, etc.

The system of hire purchase is governed by the Hire Purchase Act 1972. This Act
defines a hire purchase as "an agreement under which goods are let on hire and the
hirer has an option to purchase them in accordance with the terms and conditions laid in
the agreement”. The agreement defines very clearly and specifically the terms and
conditions to be followed by the hirer and the owner:

i) The owner of the goods would pass them to the person who would pay an
agreed sum of amount in cash or by cheque as specified or agreed upon, in
the specified number of periodic installments;
ii) The ownership of such goods would pass to such person only after the
payment of last installment by the hirer in the manner as agreed upon;
iii) The hirer has the right to terminate the agreement at any time before the
transfer of such property.

Value Addition 1: Did You Know?

Hire Purchase Agreement
In order to avoid the clashes among the involved parties and to make it enforceable at
law it is important that the agreement is prepared in accordance with the provisions of
the Hire purchase Act 1972.

As per the Act, the hire purchase agreement must specifically contain the date of
commencement of the agreement, the hire purchase price, the cash price of the
goods, number of installments agreed to be paid, the amount and the date on which
the installment is to be paid, the person who has to be paid, the place where it is
payable, and the details of the relevant goods.

It should also specify that part of the hire purchase price which is to be paid in the
mode other than cash or cheque.

If the agreement is not specifically clear about these details the hirer gets the right of
filing a suit for rescinding (cancelling) agreement.
Source: http://www.vakilno1.com/bareacts/hirepurchase/hirepurchaseact.html

The law permits the owner to sell the goods, if they are fit for selling and the hirer had
disclosed the particular purpose for which the goods were hired and the hirer returns the
goods or he defaults to pay the required installments.

Figure 2: Concept of Hire Purchase

Institute of Lifelong Learning, University of Delhi 4

 Accounting for Hire Purchase System

There is difference between a hire purchase and a financing option. The figures below
make it clear that there are three parties involved in the financing option rather than
two in the hire purchase system. The third one is the financier or the banker. Also the
process differs in the manner that a substantial part of financing is done by a financier
and not by the supplier as in the case of hire purchase. On receiving the down payment
from the customer and the financing approval from the banker, the supplier delivers
goods to the customer and passes the ownership of title to the financier. The customer
keeps paying the installments to the financier. On the payment of the last installment,
the ownership in goods is passed to the customer. However, if a default is made in
paying the installments, it is the financier who repossesses the goods from the customer
as the supplier gets out of picture once he has delivered goods and its title.

Figure 3: Concept of Financing Assets

Figure 4: Process of Financing Assets

Institute of Lifelong Learning, University of Delhi 5

 Accounting for Hire Purchase System

4. Hire Purchase System Vs. Installment System

Though Hire purchase system and the installment system both involve the payment by
way of installments yet they are different from each other in the following ways:

Hire Purchase System Installment System

1) It is a contract of hire. 1) It is a contract of sale.
2) It is governed by Hire Purchase Act 2) It is governed by Sale of Goods Act
1972. 1930.
3) The property in goods (ownership) is 3) The title of goods (ownership) passes
transferred to the purchaser from the immediately to the buyer as in the case
vendor only after the last installment is of usual sale.
paid.
4) Price is paid by purchaser through 4) Every installment is treated as payment
installment which is treated as hire. towards the price of goods.
5) The seller may take possession of the 5) The seller can only sue for unpaid price
goods back if the hirer is in default. if the buyer is in default. He cannot
take possession of the goods.
6) The purchaser cannot transfer or 6) The buyer has right to sell, transfer or
temper the goods until he pays final dispose off the goods at any time.
installment.
7) The purchaser possesses the right to 7) The buyer has no right to terminate the
terminate the agreement at any time agreement and return the goods.
before the property is so passed.

Value Addition 2: Did You Know?

History of Hire Purchase
The first use of hire purchase was evidenced in 19 th century for enabling the carriers to
procure wagons for the use in business.

Basically, it means exactly what its name suggests; a hiring of the goods until a certain
condition is met, when they become the property of the hirer. This condition is usually
the completion of all of the payments. The advantage to the finance company is
obvious; the property in the goods remains theirs until the goods are paid for. Therefore
the finance company has, at least a partial security for their debt. In the 1950s and
1960s it acquired a bad reputation. This was due to the way that some finance
companies were dealing with their customers. This lead to the first Hire Purchase Acts.

These acts, in the main, established two fundamental and far reaching legal principles:
1/ One third of the total amount payable has been paid, the finance company cannot
recover the goods without the hirers consent. Unless the finance company first obtains a
Court Order.
2/ If an innocent "private buyer in good faith" purchases the goods from the hirer, the
finance company cannot take those goods from the innocent purchaser. That is, the
finance companies property in those goods is lost. To meet those conditions the innocent

Institute of Lifelong Learning, University of Delhi 6

 Accounting for Hire Purchase System

buyer must:
A/ Be a genuine private buyer, that is not be engaged in any way in the motor trade.
B/ Be ignorant of the fact that the person from whom the goods was purchased was
hiring them under a Hire Purchase agreement.

These principles have remained intact up to the present day. In the early 1970s the Hire
Purchase Acts and Money Lenders Acts where replaced by new piece of legislation, The
Consumer Credit Act 1974. The essential parts of the old Hire Purchase Acts remained
intact; however there was now a requirement for businesses engaged in the offering of
credit to be licensed.

In later years, civil procedures have been the subject of two judicial reviews, the first
instigated by the then Lord Chancellor, the other (recent) following a report by Lord
Woolfe. Although neither of these has lead to any legislative changes, radical changes
have been made to the County Court system. The result of all this is that the system is
now much faster, slicker, and easier to use. Under the present system, anyone running
a finance company, would do well to consider undertaking their own legal work.

5. Terms used in Hire Purchase Agreement

There are many terms that are used in hire purchase transactions and accounting, but
only few are explained here.
a) Hirer: Also known as hire purchaser, the one who purchase goods under hire
purchase agreement
b) Hire Vendor: The person who sells goods under hire purchase agreement.
c) Cash price: It is actual price of goods charged under normal cash sale or the price at
which the goods may be purchased by hirer for cash.
d) Down payment: Down payment means an initial payment payable by the hirer at the
time of entering into a hire purchase agreement.
e) Hire purchase price: The total amount payable under the terms of hire purchase
agreement in the form of down payment and installments. In other words, the total of
down payment and installments is called hire-purchase price.

Hire purchase price = Down Payment + Installments

Since, installments are spread over a longer period, the seller charges interest and it is
included in the aforesaid installments. Hence installments include payment towards
cash price financed and interest on the amount financed.

Hire-purchase price = Cash Price + Interest

f) Hire purchase charges: Hire purchase charges are the difference between hire
purchase price and cash price. These charges are known as interest.

Figure 5: Process of Hire Purchase

Institute of Lifelong Learning, University of Delhi 7

 Accounting for Hire Purchase System

6. Calculation of Interest
The hire purchase price consists of (a) payment towards cash price, and (b) the
interest. The interest is charged on the unpaid cash price, which decreases with every
installment paid. Hence the amount of cash price and interest is not the same even in
equal installment for the simple reason that on every next installment, charge for
interest decreases and payment for principal increases.

On the basis of information given, problems of calculation of interest can be classified

as:
Case 1: Given: Rate of interest, Total cash price and Hire Purchase Price
Case 2: Given: Rate of interest and installments
Case 3: Given: Rate of interest and installments (Annuity method)
Case 4: Given: Rate of interest and Cash price
Case 5: Given: Total cash price and hire purchase price

Each of the above cases are described in brief below.

Case 1: Calculation of Interest when Given: Rate of interest, Total cash price
and Hire Purchase Price

Illustration 1: (Unequal Installments)

On 01.04.2005, V purchased a computer from X Ltd hire purchase basis. The cash price
of computer is Rs. 75,000 payable Rs. 15,000 as cash down and three installments of
Rs. 23,000, Rs. 22,000 and Rs. 21,000 on 31st March 2006, 2007 and 2008
respectively. Interest is charged @ 5% p.a. calculate the amount of interest paid by
buyer to seller every year.

Solution 1:

Rs

Institute of Lifelong Learning, University of Delhi 8

 Accounting for Hire Purchase System

Total Cash price 75,000

Less : Down payment 15,000

60,000
Add : Interest on Rs. 60,000 @ 3,000
5% p.a. for one year
63,000
Less : First installment 23,000
40,000
Add : Interest on Rs. 40,000 @ 2,000
5% p.a. for one year 42,000
Less : Second installment 22,000
20,000
Add : Interest (Balancing figure) 1,000
21,000

Less : Third installment 21,000

Illustration 2: (Equal Installments)

On 1st Jan 2007, Globe Press purchased a printing machine on hire purchase system
from Modern Machinery Company. The payment was to be made as Rs. 30,000 down
and balance in three equal annual installments of Rs. 20,000 each payable on 31
December every year. The vendors company charged interest @8% p.a. The cash down
value of machine was Rs. 81,543 Calculate the interest on three installments.

Solution 2: Rs

Cash price 81,543

Less : Down payment 30,000
51,543
Add : Interest on Rs. 51,543 @ 8% pa for one 4,123
year
55,666
Less : 1st Installment 20,000
35,666
Add : Interest on Rs. 27,420 @ 2,853
8% p.a. for one year
38,519
Less : 2ndInstallment 20,000
18,519
Add : Interest on 18,519 @ 8% p.a. for one year 1,481
(Balancing figure) 20,000
Less : 3rd Installment 20,000
-----

Case 2: When Given: Rate of interest and installments

Illustration 3:

On 1st April 2004, Mr. Shyam purchased machinery from M/s Vee Kay Enterprises on
hire purchase basis. The term of payment being Rs. 16,000 down Rs. 27,200 at the
end of 2004, Rs. 18,000 at the end of year 2005, Rs. 9,200 by the end of year 2006 and
Rs. 16,800 at the end of 2007. Interest is charged @ 5% p.a.

Solution 3:

In this type of question we start calculation of interest from last installment, since last
installment includes cash payment of last installment and interest towards that pending
installment only.
Suppose, Cash price installment = Rs 100
Interest @ 5% = Rs 5
Hire purchase installment = Rs 105
So, interest on Hire purchase installment is = 5/105

Year Installment Amount Interest Cash price

Rs outstanding Rs Rs
Rs
2007 16,800 16,800 16,800 x 5 16,800-800

Institute of Lifelong Learning, University of Delhi 9

 Accounting for Hire Purchase System

105
= 800 = 16,000
2006 9200 9,200+16,000 25,200 x 5 9200-1200
105
= 25,200 = 1,200 = 8,000
2005 18,000 18,000+8,000+ 42,000 x 5 18,000 - 2,000
16,000 105
= 42,000 = 2,000 = 16000
2004 27,200 27,200+16,000 67,200 x 5 27,200 – 3,200
+16,000+ 8,000 105
= 67,200 = 3,200 = 24,000
Down 16,000 _ _ 16,000
Payment
Hire Purchase Price _ Total Interest = Total Cash Price =
= Rs. 7,200 Rs. 80,000
Rs. 87,200

Illustration 4:

Vikram purchased machinery on Hire Purchase System on 1 July, 2005. The hire
purchase price is Rs. 75,000 to be payable in 5 bi-annually installments of Rs. 15,000
each. The rate of interest is 10% p.a. Calculate the cash price.

Solution 4:
In this question we have bi-annual installments i.e. each installment is to be paid after
six months. So the interest will accrue for every 6 months on outstanding balance @ 5%
(1/2 of 10% p.a.)

Installment Installment Amount outstanding Interest Cash

Amount Rs Rs price
Rs Rs
V 15,000 15,000 15,000 x 5 15,000-
105 714
= 714 = 14,286
IV 15,000 15,000+14,286 29,286 x 5 15,000-
105 1,395
= 29,286 =1,395 =13,605
III 15,000 15,000+13,605 42,891 x 5 15,000-
14,286 105 2,042
= 42,891 =2,042 =12,958
II 15,000 15,000+12,958+13,605+14,286 55,849 x 5 15,000-
105 2,660
=55,849 =2,660 =12,340
I 15,000 15,000+12,340+12,958+13,605+14,286 68,092 x 5 15,000-
105 3,247
= 68,189 = 3,247 = 11,753
Hire _ Total Total Cash
Purchase Interest = Price =
Price = Rs. 10,058 Rs.
Rs. 75,000 64,942

Illustration 5:

Veena purchases an air conditioner on the hire purchase system. She pays Rs. 7,500
down and Rs. 4,000 at the end of 2 years, 4 year and 6 year. Interest is charged by the
vendor @ 10% at 2 yearly rests on the unpaid balance. Calculate interest paid with each
installment.
Rs
Solution 5: Suppose cash price 100
Interest @ 10% p.a. for 2years 20
Hire purchase installment 120
Interest on hire purchase installment= 20

Installment Installment Amount Interest Cash price

Amount outstanding Rs Rs
Rs Rs
End of 6th year 4,000 4,000 4,000 x 20 4,000-667

Institute of Lifelong Learning, University of Delhi 10

 Accounting for Hire Purchase System

120
= 667 = 3,333
th
End of 4 year 4,000 4,000+3,333 7,333 x 20 4,000-1,222
120
= 7,333 = 1,222 = 2,778
nd
End of 2 year 4,000 4,000+2,778 10,111x20 4,000-1,685
+3,333 120
= 10,111 =1,685 =2,315

Down Payment 7,500 – – 7,500

Hire Purchase – Total Interest = Total Cash
Price = Rs. 3,574 Price =
Rs. 19,500 Rs. 15,926
Note: - If interest is charged @ 10% p.a. at yearly rest. Then
Rs
Suppose cash price be 100
+ Interest @ 10% p.a. for 1 year 10
110
+ Interest @ 10% p.a. for 1 year 11 (10% of 110)
Hire purchase installment 121

Interest on hire purchase installment= 21

_______
121

Case 3: Given: Rate of interest and installments (Annuity method)

Annuity means a series of equal payments at fixed intervals. Annuity table is used to
find out the present value of annuity for a number of years at a certain rate of interest.

Illustration 6: (Equal Installments)

Ramesh purchases a computer from M/s Software. The term of payment is being Rs.
10,000 annually for 3 years. The rate of interest charged 5% p.a. Calculate cash price of
computer with the help of annuity tables.

Solution 6:

Annuity table shows present value of annuity of Re. 1@ 5% p.a. interest for three years
is Rs. 2.7233.
Cash price of Computer = 10,000 x 2.7233 = Rs. 27,233

Illustration 7: (Unequal Installments)

Soni purchased machinery by paying Rs. 10,000 down, Rs. 10,000 at the end of 1 st year,
15,000 at the end of 2nd year and 10,000 at the end of 3rd year. Rate of interest charged
is 5% p.a. Calculate cash price with the help of annuity tables.

Solution 7:

Annuity table shows that present value of one rupee for 1, 2 and 3 years at 5% interest
is 0.9529, 0.9070 & 0.8639 respectively

Cash price = Down payment + (First installment x PV of annuity) +

of Machinery (2nd installment x PV of annuity) +(3rd installment x PV of annuity)

= 10,000+ (10,000 x 0.9529) + (15,000 x 0.9070)

+ (10,000 x 0.8639)
= Rs. 10,000 + 9,529 + 13,605 + 8639 = Rs. 41,773

Case 4: Given: Cash Price and Rate of Interest

Illustration 8:

On 1st Jan. 2005, Y ltd purchased a machine costing Rs. 70,000 from Z ltd on hire
purchase basis. The terms of payment being Rs. 10,000 down and balance in 3 annual

Institute of Lifelong Learning, University of Delhi 11

 Accounting for Hire Purchase System

installments of Rs. 20,000 each together with interest @ 10% p.a. calculate the Hire
purchase price of machine.
Rs
Solution 8:
Total cash price 70,000
Less: Down payment 10,000
60,000
Add: Interest @ 10% on 60,000 for 1 year 6,000
66,000
Less: 1stinstallment (20,000+6,000) 26,000
40,000
Add: Interest @ 10% on 40,000 for 1 year 4,000
44,000
Less: 2ndinstallment (20,000+4,000) 24,000
20,000
Add: Interest @ 10% on 20,000 for 1 year 2,000
22,000
Less: 3rdinstallment (20,000+2,000) 22,000
---------
Total Hire purchase price = Down payment + First installment + Second
Installment + Third installment
=10,000 + 26,000 + 24,000 + 22,000
= Rs. 82,000

Case 5: Given: Total cash price and hire purchase price

Illustration 9:

Aruna purchase a refrigerator on hire purchase basis. The cash price of refrigerator is
Rs. 20,000. The terms of payment being Rs. 5,000 down and balance in 3 equal
installments of Rs. 6,000 each, payable on 31st March every year. Calculate amount of
interest included in each of the annual installment.

Solution 9:

Cash price = Rs. 20,000

Hire purchase price = Down payment + Total Amount of
installments
= 5,000 + 6,000 x 3
= 5,000 + 18,000
= Rs. 23,000
Total Interest = Hire purchase price – cash price
= (23,000-20,000)
= Rs. 3,000

When rate of interest is not given, the amount of total interest is apportioned in the ratio
of amount outstanding at the end of each year.

Year Amount outstanding at Ratio Interest apportioned

the end of year Rs
Rs
I 18,000 3 3/6 x 3,000 = 1,500
II 12,000 2 2/6 x 3,000 = 1,000
III 6,000 1 1/6 x 3,000 = 500
6 Rs. 3,000

7. Accounting for Hire Purchase

Accounting for hire purchase can be recorded under various methods of recording hire-
purchase transaction:

Figure 6: Accounting for Hire Purchase

Accounting Methods
Of Recording
Hire Purchase
Transactions
Full Cash Price
Institute of Lifelong Learning, University of Delhi
Method 12
Cash Price
Method
Down Payment or
 Accounting for Hire Purchase System

7.1 Cash Price Method

There are two methods for making accounting entries of the hire purchase transaction in
the Books of the hire purchaser.

1) Full cash price method: When asset is recorded at full cash price.
The following journal entries will be passed:-

In the books of Hire Purchaser

First Year
(i) On purchases of the Asset:
Asset on Hire Purchase Account Dr With full cash price
To Hire Vendor’s Account. of Asset
(ii) On making down payment on delivery
Hire Vendor’s Account Dr With amount of
To Bank / Cash Account. down payment
(iii) For interest due on installment
Interest on Hire Purchase Account Dr With amount of
To Hire Vendor’s Account interest due
(iv) On payment of Hire Purchase installment
Hire Vendor’s Account Dr With amount of
To Cash / Bank Account installment
(v) For depreciation charged on the asset
Depreciation Account Dr
To Asset on Hire Purchase
(vi) For transfer of interest
Profit and Loss Account Dr
To Interest on Hire Purchase Account
(vii) For transfer of depreciation
Profit and Loss Account Dr
To Depreciation Account
Or
Profit and Loss Account Dr
To Interest on Hire Purchase Account
To Depreciation Account

Second and subsequent years entries (iii), (iv), (v), (vi) and (vii) will be repeated with
their respective amount of interest and depreciation provided.

In the Books of Hire Vendor

First Year

(i) On Sale of asset under Hire Purchase

Hire Purchaser’s Account Dr With total cash
To Hire Purchase Sale Account cash price of asset
(ii) On receiving down payment
Cash / Bank Account Dr With amount of
To Hire Purchaser’s Account down payment
(iii) For interest due on installment
Hire Purchaser’s Account Dr With amount of
To Interest on Hire Purchase Sales A/c interest

Institute of Lifelong Learning, University of Delhi 13

 Accounting for Hire Purchase System

(iv) On receipt of hire purchase installment

Cash / Bank Account Dr With amount of
To Hire Purchaser’s Account installment
(v) For transfer of interest
Interest on Hire Purchase Sales Account Dr
To Profit and Loss Account

Second and subsequent years entries (iii), (iv) and (v) will be repeated with their
respective amount of interest and depreciation provided.

2) Down payment/Accrual Method: When asset is recorded at cash actually paid.

The following journal entries will be passed:

In the Books of Hire Purchaser

First Year

(i) On Purchase of the Asset

Asset on Hire Purchase Account Dr With down payment
To Hire Vendor’s Account being due
(ii) On making down payment on delivery of asset.
Hire Vendor’s Account Dr With the amount
To Cash / Bank Account of down payment
(iii) When installment becoming due
Asset on Hire Purchase Account Dr With the amount of
part of cash price
Interest on Hire Purchase Account Dr With the amount of
interest
To Hire Vendor’s Account
(iv) On payment of installment
Hire Vendor’s Account Dr With the amount
To Cash / Bank Account of installment
(v) For Depreciation Charged on asset
Depreciation Account Dr
To Asset on Hire Purchase Account
(Depreciation is always charged on the total cash price of the asset and not on the
debit balance shown by the asset account)
(vi) For transfer of Interest and depreciation
Profit and Loss Account Dr
To Depreciation Account
To Interest on Hire Purchase Account

Second and subsequent years entries (iii), (iv), (v) and (vi) will be repeated with their
respective amount of interest and depreciation provided

In the Books of Hire Vendor

There is no change in the accounting treatment in the books of hire vendor under
accrual system.

Illustration 10:

On 1stApril, 2004, Sharad Steel Ltd. bought a machine on hire purchase system. The
cash price of the machine was Rs. 44,700 and payment was to make Rs. 12,000 on
signing the agreement and the balance in three installments of Rs. 12,000 each, on 31st
March of every year. The rate of interest charged by the vendor is 5% p.a. The
depreciation is calculated at 10% annually on the diminishing balance of the asset. Make
journal entries in the books of Sharad steel ltd. and the vendor under (a) full cash price
method (b) accrual method. (Ignore Narration)

Solution 10:

Calculation of Interest Rs

Cash Price 44,700

Less: Down Payment 12,000
32,700

Institute of Lifelong Learning, University of Delhi 14

 Accounting for Hire Purchase System

Add: Interest @ 5% p.a. on Rs. 32,700 for one year 1,635

34,335
Less: First Installment 12,000
22,335
Add: Interest @ 5% p.a. on Rs. 22,335 for one year 1,117
23,452
Less: Second Installment 12,000
11,452
Add: Interest on Rs. 11,452 @ 5% for one year 548
(Balancing Figure)
Third Installment 12,000

(a) Full Cash Price Method

In the Books of Sharad Steel Ltd.
Journal Entries
Date Particulars Debit Credit
Amount Amount
Rs Rs
2004 1st Machine on Hire Purchase Account Dr 44,700
April To Hire Vendor’s Account 44,700
Hire Vendor’s Account Dr 12,000
To Cash Account 12,000
2005 31st March Interest on Hire Purchase Account Dr 1,635
To Hire Vendor’s Account 1,635
Hire Vendor’s Account Dr 12,000
To Cash Account 12,000
Depreciation Account Dr 4,470
To Machine on Hire Purchase 4,470
Profit and Loss Account Dr 6,105
To Depreciation Account 4,470
To Interest on Hire Purchase Account 1,635
st
2006 31 Interest on Hire Purchase Account Dr 1,117
March To Hire Vendor’s Account 1,117
Hire Vendor’s Account Dr 12,000
To Cash Account 12,000
Depreciation Account Dr 4,023
To Machine on Hire Purchase 4,023
Profit and Loss Account Dr 5,140
To Interest on Hire Purchase Account 1,117
To Depreciation Account 4,023
2007 Interest on Hire Purchase Account Dr 548
31st March To Hire Vendor’s Account 548
Hire Vendor’s Account Dr 12,000
To Cash Account 12,000
Depreciation Account Dr 3,621
To Machine on Hire Purchase 3,621
Profit and Loss Account Dr 4,169
To Depreciation Account 3,621
To Interest on Hire Purchase Account 548

In the Books of Hire Vendor

Date Particulars Debit Credit
Amount Amount
Rs Rs
2004 Sharad Steels Ltd. Dr 44,700 44,700
To Hire Purchase Sales Account
1st April Cash Account Dr 12,000
To Sharad Steel Ltd. 12,000
Sharad Steels Ltd. Dr 1,635
To Interest on Hire Purchase Account 1,635
Cash Account Dr 12,000
To Sharad Steels Ltd. 12,000
Interest on Hire Purchase Account Dr 1,635
To Profit and Loss Account 1,635
2005 Sharad Steel Ltd. Dr 1,117
To Interest on Hire Purchase Account 1,117

Institute of Lifelong Learning, University of Delhi 15

 Accounting for Hire Purchase System

31st March Cash Account Dr 12,000

To Sharad Steel Ltd. 12,000
Interest on Hire Purchase Account Dr 1,117
To Profit and Loss Account 1,117
2006 Sharad Steel Ltd. Dr 548
To Interest on Hire Purchase Account 548
31st March Cash Account Dr 12,000
To Sharad Steels Ltd. 12,000
Interest on Hire Purchase Account Dr 548
To Profit and Loss Account 548

(b) Accrual Method

In the books of Sharad Steels Ltd. Journal
Date Particulars Debit Credit
Amount Amount
Rs Rs
2004 Machine on H P Account Dr 12,000
1st April To Hire Vendor’s Account 12,000
Hire Vendor’s Account Dr 12.000
To Cash Account 12,000
2005 Machine on HP Account Dr 10,365
31st March Interest on HP Account Dr 1,635
To Hire Vendor Account 12,000
Hire Vendor Account Dr 12,000
To Cash Account 12,000
Depreciation Account Dr 4,470
To Machine on HP 4,470
Profit and Loss Account Dr 6,105
To Interest on HP 1,635
To Depreciation Account 4,470
2006 Machine on HP Account Dr 10,883
31st March Interest on HP Account Dr 1,117
To HP Vendor Account 12,000
HP Vendor Account Dr 12,000
To Cash Account 12,000
Depreciation Account Dr 4,023
To Machine on HP 4,023
Profit and Loss Account Dr 5,140
To Interest on HP 1,117
To Depreciation Account 4,023
2007 Machine on HP Account Dr 11,452
31st March Interest on HP Dr 548
To Hire Vendor Accounts 12,000
HP Vendor Account Dr 12,000
To Cash Account 12,000
Depreciation Account Dr 3,621
To Machine on HP Account 3,621
Profit and Loss Account Dr 4,169
To Interest on HP 548
To Depreciation Account 3,621

The Journal Entries in the Books of Hire Vendor are same.

Illustration 11:

On 1stApril, 2005 Mr. Sharma purchased from Veena, a machine on hire purchase basis.
The hire purchase price was Rs. 80,000, payable as to Rs. 20,000 as down payment and
three annual installments of Rs. 20,000 each; the first annual installment being payable
on 31st March, 2006. Ms. Veena disclosed the she was charging interest @ 5% per
annum.
Mr. Sharma charged depreciation on the machine @ 15% per annum on diminishing
balances of the machine. Calculate the cash price of the machine. Also prepare: (a) Ms.
Veena Account (b) Machine Account in the books of Sharma and (c) Sharma Account in
the books of Ms. Veena.

Solution 11:

Institute of Lifelong Learning, University of Delhi 16

 Accounting for Hire Purchase System

Year Installment Amount Interest Cash Price

Amount Outstanding
Rs Rs
Rs Rs
2008 20,000 = 20,000 = 20,000 x 5/105 = 20,000-
952 952 =
19,048
2007 20,000 = 20,000 + 19,048 = 39,048 x 5/105 = 20,000-1,859 =
= 39,048 1,859 18,141
2006 20,000 = 20,000 + 18,141 = 57,189 x 5/105 = = 2,090-2,723 =
+ 19,048 = 57,189 2,723 17,277
2006 Down Payment _ - 20,000
Hire Purchase Price= Interest=Rs5,534 Cash Price
Rs 80,000 =Rs74,466

In the Books of Sharma

Dr Veena’s Account Cr

Rs. Rs.
2005 Cash Account 20,000 2005
April 1 (Down payment) April 1 Machine on HP 74,466
2006 Cash Account 2006
March (First Installment) 20,000 March 31 Interest on HP 2,723
31 Balance C/d

37,189
77,189 77,189
2007 Cash Account 20,000 2006 Balance B/d 37,189
March (secondInstallment) April 1
31 Balance C/d 2007
19,048 March 31 Interest on HP 1,859
39,048 39,048
2008 Cash Account 20,000 2007 Balance B/d 19,048
March (Third installment) April 1
31 2008
March 31 Interest on HP 952
20,000 20,000

Machine on Hire Purchase Account

Dr Cr
Rs. Rs.
2005 Ms. Veena 74,466 2006 Depreciation 11,170
April 1 March 31 Balance C/d 63,296
74,466 74,466
2006 Balance B/d 63,296 2007 Depreciation 9,494

April 1 March 31 Balance C/d 53,802

63,296 63,296
2007 Balance B/d 53,802 2008 Depreciation 8,070

April 1 March 31 Balance C/d 45,732

53,802 53,802

In the Books of Ms Veena

Dr Sharma’s Account Cr
Rs. Rs.
2005 HP Sales Account 74,466 2005 Cash Account 20,000
April 1 April 1 (Down Payment)
2006 Interest on HP 2006 Cash Account
March 31 2,723 March 31 (First Installment) 20,000
Balance c/d
37,189
77,189 77,189

Institute of Lifelong Learning, University of Delhi 17

 Accounting for Hire Purchase System

2006 Balance B/d 37,189 2007 Cash Account 20,000

April 1 March 31 (second
2007 Interest on HP 1,859 Installment)
31 March Balance C/d 19,048
39,048 39,048
2007 Balance b/d 19,048 2008 Cash Account 20,000
April 1 March 31 (Third Installment)
2008 Interest on HP 952
March 31
20,000 20,000

8. Default and Repossession

When a hire purchaser fails to pay any installment and makes as default, the hire vendor
has the right to re-possess goods under hire purchase agreement. In case of default by
purchaser, the hire vendor not only re-possess goods but also forfeits the amount of
installments already received, thus treating the amount of installments paid as hire
charges. There are two possibilities.
(i) Full Repossession: When the hire vendor takes back all the goods sold to hire
purchaser.
(ii) Partial repossession: When the hire vendor takes the possession of only some of
the total assets sold to hire purchaser and balance of goods are retained by hire
purchaser.

8.1 Accounting Treatment in Case of Full Repossession

In the books of Hire Purchaser

When the goods are repossessed by the hire vendor, then the hire purchaser closes both
Hire Vendor Account and Asset on Hire Purchase Account on the date of default by
making the following entries.

(i) Hire Vendor’s Account Dr (with amount outstanding)

To Asset on Hire Purchase Account
(ii) Any balance left in the asset account is transferred to profit and loss account.
Profit and Loss Account Dr (with Balancing figure)
To Asset on Hire Purchase Account

In the Books of Hire Vendor

On the date of default the hire vendor closes hire purchaser account by transferring the
balance to Goods Repossessed Account.
Goods Repossessed Account Dr (with balance
To Hire Purchaser’s Account outstanding)

The newly opened Goods Repossessed Account is further debited with expenses incurred
on the repair of goods repossessed and credited with cash received from resale of
goods. Any balance left in good repossession account, being profit or loss on resale, is
transferred to Profit and Loss Account.

(a) Good Repossessed Account Dr (with amount of

To Cash Account expenses)
(b) Cash Account Dr (with resale price)
To Good Repossessed Account
(C) Profit and Loss Account Dr (with amount of loss)
To Goods Repossessed Account
OR
Goods Repossessed Account Dr. (With amount of profit)
To Profit and Loss Account

Illustration12:

On 1stApril, 2006, Rohit acquired a truck from a dealer on hire purchase basis, cash price
of which was Rs. 8,00,000. The terms of payment being; Rs. 2,00,000cash down; Rs.
2,45,000 at the end of the first year; Rs. 2,30,000 at the end of second year; and Rs.
2,15,000 at the end of third year. The dealer charged interest @ 7½% per annum.

Rohit depreciated the truck at 10% per annum on written down value method. After
having made the down payment and having paid the first installment on 31st March
2007, he could not pay the second installment on 31stMarch, 2008. The hire-vendor took

Institute of Lifelong Learning, University of Delhi 18

 Accounting for Hire Purchase System

possession of the truck and after spending Rs. 30,000 on the repairs of the truck, sold it
for Rs. 5, 00,000.
Prepare the ledger accounts in the books of both the parties.

Solution 12:

Calculation of Interest
Rs
Cash Price of the Truck = 8, 00,000
Less Down Payment 2, 00,000
6, 00,000
Add: Interest on Rs. 6, 00,000 @
7½% for one year 45,000
6, 45,000
Less: 1stInstallment 2, 45,000
4, 00,000
Add: Interest on Rs. 4, 00,000 @ 30,000
7½% for one year
Balance on 31st March, 2008 4, 30,000

In the Books of Rohit (Hire Purchaser)

Dr Hire Vendor’s Account Cr
Rs. Rs.
2006 Cash Account 2,00,000 2006 Truck on Hire 8,00,000
April 1 (Down Payment) April 1 Purchase
2007
March 31 Cash Account 2007 Interest on HP 45,000
(firstinstallment) 2,45,000 March 31
Balance c/d

4,00,000
8,45,000 8,45,000
2008 Truck on HP 4,30,000 2007 April 1 Balance b/d 4,00,000
March 31 2008 March
31 Interest on HP 30,000
4,30,000 4,30,000

Dr Truck on HP Account Cr
Rs. Rs.
2006 April Hire Vendor Account 8,00,000 2007 March Depreciation 80,000
1 31 Account
Balance c/d 7,20,000
8,00,000 8,00,000
2007 April Balance b/d 7,20,000 2008 March Depreciation 72,000
1 31 Account
Hire Vendor 4,30,000
P&L Account 2,18,000
7,20,000 7,20,000

In the Books of Hire Vendor

Dr Rohit’s Account Cr
Rs. Rs.
2006 Hire Purchase Sale 8,00,000 2006 April Cash Account 2,00,000
April 1 1 2007 (Down
2007 Interest on HP March 31 payment)
March 31 45,000
2,45,000
Cash Account
(firstinstallment) 4,00,000
Balance c/d
8,45,000 8,45,000
2007 April Balance B/d 4,00,000 2008 March Goods 4,30,000
1 2008 31 Repossessed
March 31 Interest on HP 30,000 Account
4,30,000 4,30,000

Institute of Lifelong Learning, University of Delhi 19

 Accounting for Hire Purchase System

Dr Goods Repossessed Account Cr

Rs. Rs.
2008 Rohit Account 4,30,000 2008 March Cash Account 5,00,000
March 31 Cash Account 30,000 31 (Resale)
(repairs)
Profit & Loss Account 40,000
(Profit on resale)
5,00,000 5,00,000

8.2 Accounting Treatment in Case of Partial Repossession

In partial repossession, only some of the total assets sold to hire purchases are
repossessed and balance of goods are retained by hire purchaser.
All the journals entries are same as in case of full repossession except the following
difference. In case of default i.e. in case of non-payment of installments, goods on hire
purchase are divided into parts:
- Goods retained with hire purchaser
- Goods repossessed by vendor
Goods retained with hire purchaser are valued at cost less normal rate of depreciation to
the date and shown as closing balance of the asset on hire purchase account in the
books of hire vendor. Goods taken back by hire vendor are valued at agreed price. There
can be following possibilities in calculation of agreed price.
(i) Goods repossessed may be valued on the basis of enhanced rate of depreciation
i.e. agreed value of good repossessed is calculated after charging rate of
depreciation higher than normal rate applied by hire purchaser.
(ii) Any amount determined by mutual agreement between hire purchaser and hire
vendor may be taken as agreed value.
(iii) Agreed value may also be taken as a certain percentage of cash price or hire
purchase price.
The hire purchaser does not close the account of hire vendor and hire vendor does not
close the account of hire purchaser in their respective books. However, following entries
are made.
In Books of Hire Purchaser
(a) Hire Vendor’s Account Dr (With agreed value)
To Asset on Hire Purchase Account
The balance of vendor’s account is carried forward to next period.
(b) Value of goods retained by the purchaser shown as closing balance in the
goods on hire purchase account and balance is transferred to profit and loss
account.
Profit and Loss Account Dr
To Asset on Hire Purchase Account
In the Books of Hire Vendor

(a) Goods Repossessed Account Dr (with agreed amount)

To Hire Purchaser’s Account

The balance of hire purchaser’s account will be carried forward to next year.
However, all the entries relating to repairs and resale of goods repossessed will be same
as in case of full repossession.

Illustration 13 :

On 1st Jan., 2007, five computers were purchased by A on the Hire purchase system.
The cash price of each computer is Rs. 40,000. The payment was to make as follows:
10% cash price down.
25% of cash price at the end of each of the subsequent half-years.
The payment due on 31 stDecember, 2007 could not be made and hence computers were
seized by the vendor but after negotiation. A was allowed to keep three computers on
the condition that the value of the other two computers would be adjusted against the
amount due, the computers being valued at cost less 25% depreciation, A’s books were
closed on 30th June each year and be charged 15% depreciation on computers on the
original cost.
The vendor spent Rs. 5,000 on getting the computer reconditioned and sold them for Rs.
70,000. Show the necessary accounts in the books of both
parties.

Solution 13:
Calculation of Interest
Cash Price of five computers= Rs. 40,000 x 5

Institute of Lifelong Learning, University of Delhi 20

 Accounting for Hire Purchase System

= Rs. 2, 00,000
Hire Purchase Price (HPP) = Rs. 2, 20,000
of five computers
Total Interest = HPP – Cash Price
= Rs. (2, 20,000 – 2, 00,000)
= Rs. 20,000

Installment Amount Due Ratio Interest Rs.

Rs
1 2,00,000 4 20,000 x 4/10 8,000
2 1,50,000 3 20,000 x 3/10 6,000
3 1,00,000 2 20,000 x 2/10 4,000
4 50,000 1 20,000 x 1/10 2,000
20,000
Value of Computers taken away
No. of Computers = 2
Cost of Computers = 2 x 40,000
= Rs.80, 000
Less Depreciation = 20,000
@ 25%
Rs. 60,000

Value of Computers left with hire purchaser

No. of Computers = 3
Cost of Computers = 40,000 x 3
Rs. 1, 20,000
Less Depreciation @ 15%= Rs. 18,000
Rs. 1, 02,000

In the Books of A (Hire Purchaser)

Dr Hire Vendor’s Account Cr
Rs. Rs.
2007 Cash Account 20,000 2007 Computers on HP 2,00,000
Jan. 1 (Down payment) Jan. 1 Interest on HP
Cash Account June 30 8,000
June 30 (firstinstallment) 50,000
Balance C/d

1,38,000
2,08,000 2,08,000
2007 Computers on HP 60,000 2007 Balance b/d 1,38,000
Dec. 31 Balance C/d July 1
84,000 Dec. 31 Interest on HP 6,000
1,44,000 1,44,000

Dr Computers on Hire Purchase Account Cr

Rs. Rs.
2007 Hire Vendor 2,00,000 2007 Depreciation 15,000
Jan. 1 Account June 30 Account 1,85,000
Balance c/d
2,00,000 2,00,000
2007 Balance b/d 1,85,000 2008 Depreciation 15,000
July 1 Dec. 31 Account
Hire Vendor 60,000
P&L Account 8,000
(b/f)(loss)
Balance c/d 1,02,000
1,85,000 1,85,000

In the Books of Hire Vendor

Dr A’s Account Cr
Rs. Rs.
2007 2,00,000 2007 Cash Account (Down 20,000
Jan. 1 Hire Purchase Sale Jan 1 payment)
Account Cash Account
June 30 Interest on HP 8,000 (firstinstallment)
Dec. 31 Interest on HP 6,000 June 30 Good Repossessed 50,000

Institute of Lifelong Learning, University of Delhi 21

 Accounting for Hire Purchase System

Account
Dec. 31 Balance C/d 60,000

84,000
2,14,000 2,14,000

Goods Repossessed Account

Rs. Rs.
2007 A’s Account 60,000 2007
Dec. 31 Cash Account 5,000 Dec. 31 Cash Account 70,000
(repairs) (Resale)
Profit and Loss 5,000
Account
(profit on sale)
70,000 70,000

Illustration 14:

XYZ ltd sold 3 cars for a total cash sale price

Rs. 6, 00,000 on hire purchase basis to V on 1.1.2004. The terms of agreement
provided for Rs. 1, 80,000 cash down and the balance of the cash price in three equal
installments together with interest at 10% per annum compounded annually. The
installments were payable as: 1st installment on 31.12.2005, 2ndinstallment on
31.12.2006 and 3rd installment on 31.12.2007. V paid first installment on time but
failed to pay thereafter. On his failure to pay the second installment XYZ Ltd
repossessed two cars and valued them at 50% of the cash price. V charges 10% p.a.
depreciation on diminishing balance method. Prepare necessary ledger accounts in the
books of V.

Solution 14:
(i) Calculation of Interest (in Rs)
Total cash price 6,00,000
Less Down payment 1,80,000
4,20,000
Add : Interest on Rs. 4,20,000 42,000
@ 10% for one year
Balance outstanding on 31-12-2004 462,000
Add : Interest on Rs. 46200 46,200
@ 10% p.a. for on year
Balance outstanding on 31-12-2005 5,08,200
Less : 1st installment 2,28,200
[1,40,000(420000/3)+42,000+46200]
Balance on 1-12006 2,80,000
Add : Interest on Rs. 2,80,00 28,000
@ 10% p.a. for one year
Balance outstanding on 31-12-2006 3,08,000

(ii) Value of cars repossessed

No of cars = 2

Cash price of two cars: = 4, 00,000

(2, 00,000x2)
Less: 50% = 2, 00,000
2, 00,000

(iii) Value of car retained by V

No. of car 1
Cash price of Car 2, 00,000
Less Depreciation for 2004
@ 10% 20,000
1, 80,000
Less: Depreciation for 2005 18,000
1, 62,000
Less Depreciation for 2006 16,200
1, 45,800

In the Books of V
Dr XYZ Ltd Cr

Rs Rs
Institute of Lifelong Learning, University of Delhi 22
 Accounting for Hire Purchase System

2004 2004
Jan,1 Cash Account 1,80,000 Jan,1 Cars on HP 6,00,000
(Down Payment) Dec,31 Interest on HP 42,000
Dec,31 Balance c/d 4,62,000

6,42,000 6,42,000
2005 2005
Dec,31 Cash Account 2,28,200 Jan,1 Balance b/d 4,62,000
(firstinstallment) Dec,31 Interest on HP 46,200
Balance c/d 2,80,000 Account

5,08,200
5,08,200

Cars on HP 2,00,000 2006

2006 Account Jan,1 Balance c/d 2,80,000
Dec,31 Balance c/d 1,08,000 Interest on HP 28,000
Dec,31 Account

3,08,000
3,08,000

Dr Cars on HP Account Cr
2004 2004
Jan,1 XYZ ltd 6,00,000 Dec,31 Depreciation Account 60,000
Balance c/d 5,40,000
6,00,000 6,00,000
2005 2005 Depreciation Account 54,000
Jan,1 Balance b/d 5,40,000 Dec,31 Balance c/d 4,86,000
5,40,000 5,40,000
2006 2006
Jan,1 Balance b/d 4,86,000 Dec,31 XYZ ltd 2,00,000
Depreciation Account 48,600
P& L Account
(loss) 91,600
Balance c/d 1,45,800
4,86,000 4,86,000

Illustration 15:

Suresh purchased seven computers on hire purchase on 1.7.2006. The cash price of
each computer was Rs. 25,000. He was to pay 20% of the cash price at the time of
delivery and the balance in five half yearly installments starting from 31-12-2006 with
interest @ 5% p.a.
On Suresh failure to pay the installment due on 30-06-2007, it was agreed that Suresh
would return three computers to hire vendor and remaining four could be retained by
him. The returning price of three computers was Rs. 20,250. Suresh charges
depreciation @ 20% p.a.
Hire vendor after spending Rs. 750, on repairs sold away all the three computers for Rs.
20,000. Show necessary ledger accounts in the books of Suresh and hire vendor
assuming that books are closed on
30th June.

Solution 15: (i) Calculation of interest

Rs
Total cash price of seven computers 175,000
Less Down payment of seven computers 35,000
Balance amount due as on 1-7-2006 1,40,000
Add : Interest on 1,40,000 3,500
@ 5% for 6 months i.e. up to 31-12-2006
Balance amount due as on 31-12-2006 1,43,500
Less : 1st installment paid on 31-12-2006 31,500
(28,000+3,500) _______
Balance amount due as on 1-1-2007 1,12,000

Institute of Lifelong Learning, University of Delhi 23

 Accounting for Hire Purchase System

Add : Interest on Rs. 1,12,000 2,800

@ 5% p.a. for 6 months up to 30-6-2007 ________
Balance amount due as on 30-6-2007
1,14,800

(ii) Value of computers retained by Suresh

No of computers retained = 4
Total cash Price of 4 computers = 1, 00,000
Less: Depreciation for one year = 20,000
@ 20% p.a _______
Book value of computers as on 30-6-2007 80,000
_______

In the Books of Suresh

Dr Hire Vendor’s Account Cr
2006 2006
July,1 Cash Account 35,000 July,1 Computeron HP 1,75,000
(Down payment) Dec,31 Interest on HP 3,500
Dec,31 Cash Account 31,500 2007
(firstinstallment) June,30 Interest on HP 2,800

2007 Computers on HP 20,250

June,30 Balance c/d 94,550
1,81,300 1,81,300

Dr Computers on Hire Purchase Account Cr

2006 2007
July,1 Hire Vendor’s 1,75,000 June,30 Depreciation 35,000
Account Account
Hire Vendor 20,250
P& L Account 39,750
(loss)
Balance c/d 80,000
1,75,000 1,75,000

In the Books of Hire Vendor

Dr Suresh’s Account Cr
2006 2006
July,1 Hire Purchase sales 1,75,000 July,1 Cash Account 35,000
(down payment)
Dec,31 Interest on HP 3,500 Dec,31
2007 2007 Cash Account 31,500
June,30 Interest on HP 2,800 June,30 (first installment)
Goods Repossessed 20,250
Balance c/d 94,550
1,81,300 1,81,300

Dr Goods Repossessed Account Cr

Rs Rs
2007 2007
June,30 Suresh’s Account 20,250 June,30 Cash Account 20,000
Cash Account (Resale)
(Repairs) 750 P&L Account 1,000
(loss)
21,000 21,000

9. Hire purchase Trading Account or Debtor System

Sometimes, business sells goods both on cash basis and hire purchase basis. When
numerous items of the small value such as cycles, fans, radios, TV etc are sold on hire
purchase basis involving many transactions during an accounting year, it becomes very
difficult to maintain separate accounts for each customer, calculation of interest and
profit & Loss. It will involve lot of cost, efforts and time. Under such circumstances, Hire
Purchase Trading account is adopted. For keeping records of hire purchase method
transactions a separate book called Hire Purchase Register or Hire Purchase Sales book
is maintained to record date of contract, name of hire purchaser, cost price, hire
purchase price, down payment, number of installments and amount of each installment

Institute of Lifelong Learning, University of Delhi 24

 Accounting for Hire Purchase System

with dates when they become due. At the end of the year, profit or loss on hire
purchase is calculated by extracting the following information from accounting records:
1) Cost of goods sold on hire purchase.
2) Total cash received from hire purchase customer (down payment + installments)
during the year,
3) Installments due but not paid by the hire purchase customer,
4) Installments not yet due. It is also known as stock lying with hire purchase
customers.

Hire purchase Trading Account may either be prepared at cost or at hire purchase price.

(i) Hire Purchase Trading Account at cost

Under this method all transactions are recorded at cost. The following entries will
be made in this method.
1) For recording Opening Balances.
Hire Purchase Trading Account Dr (Cost Price)
To Stock with HP Customers Account
or
Installments Not Due Account Dr
To Installments Due Account (Hire Purchase Price)
2) For goods sold on hire purchase basis during the year
Hire Purchase Trading Account Dr (Cost Price)
To Goods Sold on Hire Purchase Account
3) On receipt of cash from HP customers including cash down
Bank/Cash Account Dr (Down payment and
To Hire Purchase Trading Account installments received)
4) On repossession of goods due to non-payment of installment due
Goods Repossessed Account Dr (with agreed/estimated value)
To Hire Purchase Trading A/c
5) For recording closing balances
Installment Due A/c Dr (Hire Purchase Price)
Stock with HP customer Account/ Dr (Cost Price)
or
Installment Not Due Account Dr
To Hire Purchases Trading A/c
6) In case of profit
Hire Purchase Trading A/c Dr (Profit)
To Profit and Loss A/c
7) In case of loss
Profit and Loss A/c Dr (Loss)
To Hire Purchase Trading A/c
Dr. Hire purchase Trading Account (At cost) Cr.
Particulars Rs. Particulars Rs.
Balance b/d Cash Received from HP Customer __
Stock with HP customer (at cost) Goods Repossessed (Agreed
Installment Due (at HP Price) value)
Goods Sold on HP basis (cost)* Balance c/d
Profit & Loss Account (Profit) Stock with HP customer (at cost)
(Balancing Figure) Installment Due (at HP Price) ___
Profit & Loss Account(loss)
(Balancing figure) __

*Cost of Goods Sold on HP is arrived as:

Stock at shop in the beginning (at cost)
Add: Purchases during the year
Less: Stock at shop at the end.

Illustration 16:

SV Electronics sell electronic appliances on hire purchase basis. The hire purchase price
is cost plus 40%. From the following particulars prepare Hire Purchase Trading Account
for the year ended 31st March 2010.

2009 Rs
April, 1 Stock at shop at cost 1,000
Installments not due not paid 3,500
Installments due 1,250
2010

Institute of Lifelong Learning, University of Delhi 25

 Accounting for Hire Purchase System

March, 31 Stock at shop at cost 1,500

Installments not due not paid 2,800
Installments due 3,250
Goods repossessed valued at 250
(Installment due Rs. 1,000)
Cash received during the year 12,500
Purchase made during the year 8,000

Solution 16:
In the books of SV Electronics
Hire Purchase Trading Account
for the year ended 31st March 08
Dr. Cr.
Prticulars Rs. Particulars Rs.
Balance b/d: Cash Received 12,500
Stock with HP Customers A/C 2,500 Goods Repossessed 250
(1) A/C(valued at)
1,250 Balance c/d:
Installment Due Account 7500 Stock with HP Customers 2,000
Goods Sold on HP A/C (3) 6,750 A/C (2) 3,250
Installment Due
Profit & Loss Account
(Profit) (Balancing figure)
19,500 19,500

1) Stock with HP customers/Installments not due in the beginning

Rs
At Hp Price 3500
Less Profit elements 1000
(3500 x 40/140)
Value at cost 2500
2) Stock with HP customers/Installments not due at the end
At HP price 2,800
Less Profit element 800
(2800 x 40/140)
Value at Cost 2,000
3) Goods Sold on HP basis
Stock at shop in the beginning (at cost) 1000
Add: Purchases during the year 8000
Less: Stock at shop at the end. 1500
Goods sold on HP 7500

ii) Hire Purchase Trading Account (At selling price)

The entries are same as in Hire Purchase Trading A/c at cost, but for elimination of profit
margin from opening stock with HP customer, goods sold on hire purchase and closing
stock with HP Customer, the following additional entries are made:
(i) For adjusting/removing loading on Goods sold on HP basis
Goods Sold on HP A/c Dr
To Hire Purchase Trading A/c
(With profit element)
(ii) For adjusting/removing loading on opening stock with HP customer
Stock Reserve A/c Dr
To Hire Purchase Trading A/c
(With profit element)
(iii) For adjusting/removing loading on closing stock with HP customer
Hire Purchase Trading A/c Dr
To Stock Reserve A/c
(With profit element)

Performa Hire Purchase Trading A/c

Dr (At Selling Price) Cr
Particulars Rs. Particulars Rs.

Institute of Lifelong Learning, University of Delhi 26

 Accounting for Hire Purchase System

Stock with HP Customers HPP Cash Received during the -

A/C(in the beginning) year
Installment Due A/C(in the HPP Goods Repossessed from Agreed
beginning) defaulting customers Value
Goods sold on HP A/C(during HPP (valued at)
the year) Profit Stock Reserve Account Profit
Stock Reserve Account Element (loading on opening stock) Element
(loading on closing stock) Goods sold on HP basis Profit
Hire Purchase Expenses A/C (loading on goods sold on Element
Profit & Loss Account HP)
(profit)(Balancing figure) Stock with HP customer A/C HPP
(at the end)
Installment Due A/C (at the HPP
end)
Profit & Loss Account
(loss) (Balancing figure)

Illustration 17:
XYZ Ltd. sells goods on hire purchase system. The hire purchase price includes a profit
of 30% on cost. From the following particulars prepare Hire Purchase Trading Account
for the year ended 31st March 2010.
Rs
April 1, 2009 Stock out with HP Customers (at SP/HPP) 15,600
Installment due 9,000
March, 31 2010 Goods sold on HP (At SP/HPP) 1,82,000
Installment not due/Stock with HP customers 78,000
Hire Purchase Expenses 6,600
Cash received from HP Customers 1,36,000
Installments due 20,000
Goods Repossessed valued at (Installment due Rs. 1,600
6,000)

Solution 17: In the Books of XYZ Ltd.

Hire Purchase Trading Account (at HPP)
Dr for the year ended March 31st, 2008 Cr
Rs Rs
Stock with HP customer 15,600 Cash Account 1,36,000
Account Goods Repossessed 1,600
Installment Due Account Account
Goods Sold on HP basis 9,000 Stock Reserve 3,600
Account Account(1)
Stock Reserve Account(3) 1,82,000 Goods Sold on HP 42,000
Hire Purchase Expenses basis Account(2)
Account In s t a l l m e n t n o t 78,000
P & L Account (Profit) 18,000 due/Stock with HP
customers Account
6,600 In s t a l l m e n t D u e 20,000

50,000

2,81,200 2,81,200

1. Loading on Opening Stock = 15,600 × 30/130 = 3600.

2. Loading on goods sold on HP = 1, 82,000 × 30/130 = 42,000.
3. Loading on closing stock = 78,000 × 30/130 = 18,000

10. Calculation of Missing Figures

In most of examination problems, information required for the preparation of Hire

Purchase Trading Account such as opening or closing balance of Stock with HP
customers or installment not due or installment due, cash received from customers or
any other figure is missing. For calculation of these missing figures, the following three
accounts are prepared:
1. Shop Stock Account (Always at cost price)
2. Stock with the Hire Purchase Customers / Installment Not Due Account.(Always
at HPP)
3. Installment Due Account.(Always at HPP)

Institute of Lifelong Learning, University of Delhi 27

 Accounting for Hire Purchase System

First Account
Dr Shop Stock Account (At cost price) Cr
Balance b/d - Stock with HP customer cost
(opening stock) (Being goods sold at hire
Purchases - purchase at cost)
-
Balance c/d
(Closing stock)

Second Account
Dr Stock with HP customers A/C (At HPP) Cr
Balance b/d In s t a l l m e n t D u e A / C -
Shop Stock Account -- (Being installments
due during the year)
Goods sold to HP (cost+Profit)
Customer Balance c/d -
( transfer from Shop
Stock Account)

Third Account

Dr Installments Due Account (At HPP) Cr

Balance b/d - Cash Received -

Stock with HP - Goods Repossessed -

customer
(Installment due, Balance c/d -
transferred from
Stock
with HP customer
A/C)

Illustration 18:

Raj Electronics sells goods on Hire Purchases basis at a profit of 50% on cost. From the
following information, prepare Hire Purchase Trading Account for the year ended 31st
December 2009 (a) at cost (b) at selling price/HPP.
Rs.
Jan. 1 Stock with Hire Purchase Customers 9,000
(At SP)/HPP)
Stock at shop at cost 18,000
Installments due 5,000
Dec. 31 Cash Received from Customers 60,000
Goods Repossessed (installments due Rs. 2,000) 500
valued at
Installment due 9,000
Stock at shop at cost (excluding goods repossessed) 20,000
Goods purchased during the year 60,000

Solution 18:
Calculation of missing figures
In the Books of Raj Electronics
Dr Stock at Shop A/c (At cost price) Cr
Rs. Rs.
Balance b/d 18,000 Stock with HP (b/f) (at cost) 58,000
Purchases 60,000 Balance c/d 20,000
78,000 78,000

Institute of Lifelong Learning, University of Delhi 28

 Accounting for Hire Purchase System

Installment Due Account/

Dr Stock with H.P. Customers A/c (at HPP) Cr
Rs. Rs.
Balance b/d 9,000 Installment due (Transfer from 66,000
installment due)
Stock at Shop 87,000 Balance c/d (b/f) 30,000
(58,000 + 29,000 Profit)
(Goods sold on HP) &
(Transfer from Stock at Shop)
96,000 96,000

Hire Purchase Debtors Account/

Dr Installment Due A/c (At HPP) Cr
Rs. Rs.
Balance b/d 5,000 Cash Received 60,000
Stock with HP (b/f) 66,000 Good Repossessed 2,000
(installment due but not paid)
Balance c/d 9,000
71,000 71,000

Hire Purchase Trading Account (at cost)

Dr for the year ended 31st Dec, 2009 Cr
Rs. Rs.
Balance b/d Cash Account 60,000
Stock with HP Good Repossessed Account 500
Customers or
Installments Not Due 6,000 (Agreed Value)
Account
Installments Due Account 5,000
Balance c/d
Goods sold on HP basis 58,000
(at cost)(B/f of Shop Stock
Account)
Profit & Loss A/c (Profit) 20,500 Installments not due 20,000
Installments due 9,000
1,09,500 1,09,500

Hire Purchase Trading Account (At HPP)

Dr for the year ended 31st Dec. 2009 Cr
Rs. Rs.
Balance b/d Cash Account 60,000
Stock with HP 9,000 Goods Repossessed Account 500
customers/Installments Not Due (Agreed value)
Account
Installments Due Account 5,000 Stock Reserve Account (1) 3,000
Goods sold at HP basis 87,000 Goods sold at HP Basis (2) 29,000
(during the year)
Stock Reserve (3) 10,000 Balance c/d
Profit & Loss A/c 20,500 Installments Not Due/ Stock 30,000
(balancing figure)(Profit) with HP customers)
Installments Due Account 9,000
1,31,500 1,31,500

1. Loading on opening stock at HP

= 50/150 × 9,000 = 3,000
2. Loading on goods sold at HP
= 50/150 × 87,000 = 29,000
3. Loading on closing stock at HP
= 50/150 × 30,000 = Rs. 10,000

11. Stock and Debtors System

This is an alternative method of calculating profit or loss on hire purchase transactions.
Under this method, beside the three ledger accounts namely Shop Stock Accounts,
Installment Not Due A/c and Installment Due A/c (already been discussed in 11.10),Hire
Purchase Adjustment Account is prepared (instead of Hire Purchase Trading A/c) for

Institute of Lifelong Learning, University of Delhi 29

 Accounting for Hire Purchase System

calculation of profit or loss on hire purchase transactions. If goods have been

repossessed, the Goods Repossessed A/c should also be prepared.

The following journal entries are made under this method:

(i) When goods are purchased for shop stock
Shop Stock Account Dr. (Cost price)
To Purchases Account
(ii) When goods are sold on Hire Purchase
Hire Purchase stock A/c Dr. (HP Price)
To Shop Stock A/c Dr (Cost)
To Hire Purchases Adjustment A/c (Loading)
(iii) When installments become due
Hire Purchase Debtors A/c Dr. (HP Price)
To Hire Purchase Stock A/c
(iv) When cash is received from hire purchase debtors
Cash Account - Dr.
To Hire Purchase Debtors A/c
(v) When goods are repossessed on default
Goods Repossessed A/c Dr. (Agreed
Value) HP Adjustment
A/c Dr. (Loss on Repossession)
To Hire Purchase Debtors A/c (Total Installment due)
(vi) For reserve on opening Stock with Hire Purchase Customers
Stock Reserve A/c Dr. Loaded Price
To Hire Purchase Adjustment A/c
(vii) For reserve on closing stock with hire purchase customers.
Hire Purchase Adjustment A/c Dr. Loaded Price
To Stock Reserve A/c
(viii) For profit on Hire Purchase.
Hire Purchase Adjustment A/c Dr. (Profit)
To Profit & Loss A/c
Or
For loss on Hire Purchase
Profit & Loss A/c Dr. (Loss)
To Hire Purchase Adjustment A/C

Dr Hire Purchase Adjustment A/c Cr

Rs. Rs.
Stock Reserve Account - Stock Reserve Account -
(loading on closing stock) (loading on opening stock)
Loss on Goods Repossessed - Goods sold on HP Basis/Hire -
Purchase Stock Account
(load)
Profit on Repossession
Hire Purchase Expenses - Profit & Loss A/c (Loss) -
Profit & Loss A/c (Profit) - (Balancing figure)
(Balancing figure)

Illustration 19:

Gupta and Co. have a hire-purchase department. Goods are sold on hire purchase at
cost plus 33 1/3%. From the following particulars, prepare Shop Stock A/c, HP Debtors
A/c, HP Stock A/c & HP Adjustment A/c
Rs
1-1-2009 Stock out with HP Customer at HPP 8,000
Stock at Shop at Stock 1,000
Installment Due 600
1-1-2009 to Cash received from Customers 16,000
31-12-2009
Goods Repossessed (Installments due Rs. 4,000) valued
at 1,000
(this has been included in the Stock at Shop at the end
at Rs1,000)
31-12-2009 Installments Due 1,000
Stock at Shop (including goods repossessed) 2,400
Stock out with HP Customer at HPP 9,200
Verify your results by preparing Hire Purchase Trading Account.

Institute of Lifelong Learning, University of Delhi 30

 Accounting for Hire Purchase System

Solution 19:
Dr Shop Stock A/c (At Cost) Cr
Rs. Rs.
Balance b/d 1,000 HP Stock A/c (Cost) 16,200
Purchases (B/f) 16,600 Balance c/d 1,400
(2,400 - 1,000)
17,600 17,600

Dr Installment Not Due A/c / HP Stock A/c (At HPP) Cr

Rs. Rs.
Balance b/d 8,000 Installment Due 20,400
Shop Stock A/c 21,600 Balance c/d 9,200
(Being good sold at HP)
(balancing Figure)
29,600 29,600

Dr Installment Due A/c / HP Debtors A/c (At HPP) Cr

Rs. Rs.
Balance b/d 600 Cash Account 16,000
HP Stock A/c 20,400 Good Repossessed 4,000
(Installments due)
(Balancing Figure)
Balance c/d 1,000
21,000 21,000

Dr Hire Purchase Adjustment A/c Cr

Rs. Rs.
Stock Reserve Account 2,300 Stock Reserve Account 2,000
(loading on closing stock) (loading on opening stock)
Loss on Goods Repossessed 3,000 Goods sold on HP Basis 5,400
(4000 - 1000) Account
Profit & Loss A/c(Profit) 2,100 (loading on goods sold on HP
(Balancing Figure) basis during the year)
7,400 7,400

Alternatively:

Dr Hire Purchase Trading A/c Cr

Rs. Rs.
Balance b/d Cash Received 16,000
Stock with HP 8,000 Good Repossessed Account 1,000
Customers/Installments Not Due
A/c
Installments Due A/c 600 Stock Reserve Account 2,000
Goods Sold at HP 21,600 Goods Sold at HP Account 5,400
(loading on goods sold)
Stock Reserve Account 2,300 Balance c/d
Profit & Loss A/c (Profit) 2,100 Installment Not Due / 9,200
(Balancing Figure) Stock with HP Customers
account
Installments Due A/c 1,000
34,600 34,600

Illustration 20:

Raman of Delhi sells goods on hire purchase basis. He adds 50% to the cost of goods
sold while selling goods at hire purchase. From the information given below, prepare
Hire Purchase Adjustment A/c and all other relevant ledger accounts to show profits or
loss. Also verify your results by preparing Hire Purchase Trading A/c.
April 1, 2009 Rs.
Stock/Goods out on Hire Purchase (at cost price) 40,000
Installments Due 1,500
Purchases during the year 3,02,000
Cash received during the year 4,53,000
Total amounts of installments that fell during the year 4,63,500

Institute of Lifelong Learning, University of Delhi 31

 Accounting for Hire Purchase System

One customer to whom goods had been sold for Rs. 7,500 paid only five installments of
Rs. 500 each. On his failure to pay the monthly installments of Rs. 500/- each due in
November and December, 2009, the goods were repossessed an 31 st Dec., 2009 after
legal proceedings.

Solution 20:

Dr Stock at Shop A/c (At Cost Price) Cr

Rs. Rs.
Purchases 3,02,000 HP Stock A/c 3,02,000
(Balancing figure)
3,02,000 3,02,000

Dr Installment Due/HP Stock A/c (At HPP) Cr

Rs. Rs.
Balance b/d 60,000 HP Debtors A/c 4,63,500
(40,000 + 20,000) Goods Repossessed Account 4,000
Stock Shop A/c 4,53,000 Balance c/d 45,500
(3,02,000 + 1,51,000) (Balancing figure)
5,13,000 5,13,000

Dr Installment Due/HP Debtors A/c (At HPP) Cr

Rs. Rs.
Balance B/d 1,500 Cash received 4,53,000
HP Stock A/c (B/f) 4,63,500 Goods Repossessed 1,000
Balance C/d 11,000
4,65,000 4,65,000

Dr HP Adjustment A/c Cr
Rs. Rs.
Stock Reserve 15,167 Stock Reserve 20,000
Loss on goods repossessed Nil Goods sold at HP 1,51,000
Profit & Loss A/c 1,55,833
(Profit)
1,71,000 1,71,000

Alternatively:

Dr HP Trading A/c (At HPP) Cr

Rs. Rs.
Balance b/d Cash Received 4,53,000
HP Stock Account 60,000
HP Debtors Account 1,500 Goods Repossessed Account 5,000
Goods Sold at HP Basis 4,53,000 Stock Reserve 20,000
Stock Reserve Account 15,167 Goods sold at HP Basis 1,51,000
Profit & Loss A/c (Profit) 1,55,833 Balance C/d 45,500
HP Stock at end
HP Debtors Account at the end. 11,000
6,85,500 6,85,500

(1) On Goods Repossessed out of total 15 (7500/500) installments; 5 paid, and 2 are
due and not paid and 8 are not yet due. Hence,
Goods Repossessed A/c 5,000
To HP Stock A/c 4,000 (500x8)
To HP Debtors A/c 1,000 (500x2)

In the absence of any information, valuation of goods repossessed does not change.

Illustration 21:

R & Co. records transactions relating to hire-purchase business on stock & debtors
system. It sold to Ramesh a tape recorder for which he is required to pay in all Rs.
2,400 in the form of 12 monthly installments of Rs. 200 each. Ramesh paid four
installments in time but thereafter stopped paying installments. R & Co. after the

Institute of Lifelong Learning, University of Delhi 32

 Accounting for Hire Purchase System

seventh installment had also become due repossessed the tape recorder. R & Co. valued
repossessed tape recorder at Rs. 1,700. In the books of the company pass a journal
entry to record the effect of repossession of tape recorder from Ramesh.

Solution 21:

Goods Repossessed A/c – Dr. 1,700

To Installments Not Due A/c (5*200) 1,000
To Installments Due A/c (3*200) 600
To Hire Purchase Adjustment A/c 100
(Balancing figure)
Note: - If goods repossessed are valued at price which is less than Installment not due
&Installment Due, in that case difference is treated as loss and debited to Hire Purchase
Adjustment A/c.

Illustration 22:
Vikram had delivered goods to his customers on hire purchase system at hire purchase
price Rs. 46,000. He normally sells goods in the open market at retail price showing
gross profit of 30% on that price. In order to sell goods at hire purchase price he adds
15% to retail price. During the year, goods actually costing Rs. 2,800 were returned by
a customer who had paid nothing. Installments received during the year Rs. 18,400.
Calculate:
(i) Stock with hire purchase customer
(ii) Profit or loss transferred to Profit & Loss A/c

Solution 22:

In the Books of Vikram

Dr Stock with HP Customers Account (At HPP) Cr

Rs. Rs.
Goods Sold at HP 46,000 Installment Due 23,000
(transferred from HP Debtors
Account)
Balance C/d 23,000
(Balancing Figure)
46,000 46,000

Dr HP Debtors Account/Installment Due A/c (At HPP) Cr

Rs. Rs.
Stock at HP 23,000 Cash received 18,400
(Balancing figure) Goods Repossessed (1) 4,600
Balance C/d -
23,000 23,000

Dr HP Adjustment A/c Cr
Rs. Rs.
Stock Reserve (loading) 9,000 Goods Sold at HP (loading) 18,000
(23,000 x 45/115) (46,000 x 45/115)
Loss on Good Repossessed 1,800
(4600 – 2800)
Profit & Loss A/c(Profit) 7,200
18,000 18,000
Working Notes
Let Retail Price be = Rs. 100
Profit on retail price = Rs. 30 (30% of Rs. 100)
Cost Price = Rs. 70
HP Price = 100 + 15% of 100
= Rs. 115
Profit = HP Price – Cost Price
= Rs 115 – 70
= Rs. 45
1) Value of goods repossessed
Cost Price = Rs. 2,800
HP Price = Rs. 2800 x 115/70
= Rs. 4,600

Illustration 23:

Institute of Lifelong Learning, University of Delhi 33

 Accounting for Hire Purchase System

Nelco Co. sold a Colour TV Set to Suresh on hire purchase system on 01-01-2006 for Rs.
18,400. Suresh paid Rs. 4,000 on the same date to receive the delivery of TV Set and
agreed to pay the balance in 6 equal monthly installments, each installment becoming
due on the last day of each month.

Suresh paid three installments in time but failed to pay the other installments. In May
2006 (before the monthly installment has become due) the seller repossessed the TV
Set. The repossessed was valued at Rs. 7,000.Show necessary ledger accounts in the
books of Nelco Co.

Solution 23:
In the Books of Nalco Co.
Dr Stock with HP Customers A/c (At HPP) Cr
Rs. Rs.
Goods sold at HP 18,400 Installment Due 13,600
(2400 x 4 + 4,000)
Goods Repossessed 4,800
(2400 x 2)
18,400 18,400

Dr Installment Due A/c (At HPP) Cr

Rs. Rs.
Stock at HP 13,600 Cash Received 11,200
(4000 + 2400 x 3)
Goods Repossessed 2,400
(2400 x 1)
13,600 13,600

Dr Goods Repossessed A/c Cr

Rs. Rs.
Stock with HP 4,800 Hire Purchase Adj. A/c 200
(loss)
Installment Due 2,400 Balance C/d 7,000
7,200 7,200

Illustration 24:
Delhi TV House sells goods both on Cash and hire purchase basis and records hire
purchase transactions on stock and Debtors System and closes its books on December
31st every year.

On 01-04-2009, it sold to Sajan a color TV Set &VCR, the other particulars are as
follows:
Item TV Set VCR
Cash Price Rs. 9,000 Rs. 16,000
Down Payment Rs. 2,000 Rs. 4,000
No. of installments 10 8
Amount of each installments Rs. 1,000 Rs. 2,000
Mode of Payment Monthly Bi-monthly
First installment due on 01-05-2009 01-06-2009

Sajan paid all installments due except for those due on December 1, 2009. It was
decided that TV House will take back VCR at an agreed price of Rs. 10,000.

VCR repossessed was sold for Rs. 12,000 after repair charges which amounted to Rs.
500 only. Prepare necessary ledger accounts to record the above transactions and find
out the profits.

Solution 24:

In the Books of Delhi TV House

Dr Stock with HP Customers A/c (At HPP) Cr

Rs. Rs.
Goods Sold on HP (1) 32,000 Installment Due (2) 22,000
Goods Repossessed A/c (4) 8,000
Balance C/d (5) 2,000
32,000 32,000

Institute of Lifelong Learning, University of Delhi 34

 Accounting for Hire Purchase System

Dr HP Debtors/Installment Due A/c (At HPP) Cr

Rs. Rs.
Stock at HP 22,000 Cash received (3) 19,000
Goods Repossessed (4) 2,000
Balance C/d 1,000
22,000 22,000

Dr Goods Repossessed A/c Cr

Rs. Rs.
Stock at HP 8,000 Cash Account (Sale Price of 12,000
Repossessed Goods)
Installment due 2,000
Cash (Repairs) 500
HP Adjustment A/c 1,500
(Profit)
12,000 12,000

Dr Hire Purchase Adjustment A/c Cr

Rs. Rs.
Stock Reserve (7) 500 Goods sold at HP (6) 7,000
(loading)
Profit & Loss A/c 8,000 Goods Repossessed 1,500
(Profit on Disposal)
8,500 8,500

Working Notes:

TV VCR

Rs Rs
Cash Price 9,000 16,000
Down Payment 2,000 4,000
HPP 1,000 x 10 + 2,000 2,000 x 8 + 4,000

= 12,000 = 20,000
Profit 3,000 4,000
1) Goods Sold at HP Rs
TV 12,000
VCR 20,000
32,000

2) Installment due during year Rs

TV = Down Payment 2,000
Installments (8x1, 000) 8,000
10,000
VCR = Down Payment 4,000
Installments (4x2000) 8,000
12,000

Total = 10,000+ 12,000 = 22,000

3) Cash Received Rs
TV = Down Payment 2,000
Installments (7x1, 000) 7,000
9,000

VCR = Down Payment 4,000

Installments (3x2,000) 6,000
10,000
Total = 19,000
4) Good Repossessed Rs
Good Repossessed A/c Dr 10,000
To Installment Due A/c 2,000
To Stock at HP A/c 8,000
10,000
5) Stock with HP Customers at HPP at the end

Institute of Lifelong Learning, University of Delhi 35

 Accounting for Hire Purchase System

Installment Not Due on TV= 2 installments of Rs. 1,000 each

= Rs 2,000
6) Stock Reserve on goods sold at HP
Rs
TV 3,000
VCR 4,000
7,000
7) Stock Reserve on Closing Stock (T V Set)
TV 2,000 x 3,000 = Rs. 500
12,000

Illustration 25:

Neeru Ltd. commenced business on 18th April, 200p. The business is to sell VCPs & VCRs
both for cash and on hire purchase basis. Information about terms is given below:

VCPs (Rs.) VCRs (Rs.)

Cash Price 10,000 30,000
Cost 8,000 24,000
Down Payment 2,000 6,000
Monthly Installments 1,000 3,000
No. of Installments 10 12
The company purchased goods costing Rs. 1, 00, 00,000 in all and made cash sales
totaling Rs. 86, 00,000. Stock in hand on 31 stMarch, 2008 was valued at Rs. 12, 00,000.
Hire purchase transactions were as follows:

Number Sold Installment Collected Installments due (Customer

Paying)
VCPs 20 110 10
VCRs 40 260 15

3 VCPs and 2 VCRs on which only 4 installments were collected were repossessed and
were valued at Rs. 32,000. This is not included in the figure of stock mentioned above.
Prepare accounts showing profit or loss made by company by adopting “Stock &
Debtors” System.

Solution 25:

Dr Stock with HP Customer A/c (At HPP) Cr

Rs. Rs.
Goods Sold at HP (1) 19,20,000 Installment Due (3) 12,91,000

(Being installment due during

the year)
Balance C/d (4) 6,29,000
19,20,000 19,20,000

Dr Installment Due A/c (AT HPP) Cr

Rs. Rs.
Stock with HP customer 12,91,000 Cash Received (2) 11,70,000
Good Repossessed (5) 66,000

Balance C/d

(10*1,000+15*3,000) 55,000
12,91,000 12,91,000

Dr Goods Repossessed A/c Cr

Rs. Rs.
Installment Due account 66,000 HP Adjustment Account 34,000
(loss)
Balance C/d 32,000
66,000 66,000

Dr HP Adjustment A/c Cr

Institute of Lifelong Learning, University of Delhi 36

 Accounting for Hire Purchase System

Rs. Rs.
Stock Reserve (6) 2,63,667 Goods Sold on HP (Loading) 8,00,000
Goods Repossessed Account 34,000 (20x4000 + 40x18000)

(loss)
Profit & Loss A/c 5,02,333
8,00,000 8,00,000

Dr General Trading A/c Cr

Rs. Rs.
Purchases 1,00,00.000 Sales for Cash 86,00,000
Gross Profit 14,22,333 Goods Sold HP Customers 11,20,000
(Cost)

(19,20,000 – 8,00,000)
Closing Stock 12,00,000
HP Adjustment Account 5,02,333

(Profit)
1,14,22,333 1,14,22,333

Working Notes
VCPs VCR
Cost 8,000 24,000
Down Payment 2,000 6,000
Installment 1,000 3,000
No. of Installments 10 12
HPP 200+(1000x10) = 12,000 6000+(3000x12) = 42,000
Profit 4,000 18,000

1) Goods Sold at HP
VCP 20 @ Rs. 12,000 = 2, 40,000
VCR 40 @ Rs. 42,000 = 16, 80,000
= 19, 20,000
2) Cash Received
VCP Down Payment 20 x 2,000 40,000
Installments 110 x 1,000 1, 10,000
1, 50,000
VCR Down Payment 40 x 6,000 2, 40,000
Installments 260 x 3,000 7, 80,000
10,20,000

Total = Rs 1,50,000+Rs 10,20,000 = Rs 11, 70,000

3) Installment Due
VCP
Down Payment 20 @ 200 40,000
Installment Collected & due (110 + 10) = 120
Add: Installment due (3x6) = 18
3 repossessed VCP 138 @ 1,000each 1,38,000
1, 78,000
VCR
Down Payment 40 @ 6,000 = 2, 40,000
Installment Collected & due (260 + 15) = 275
Add: Installments due on (2 x 8) = 16
2 VCRs Repossessed = 291 @ 3,000each 8,73,000
11,13,000

Total = 1,78,000+11,13.000= 12, 91,000

(4) Installments Not Due

VCP
Units sold less repossessed x no. of Installment 17x10 = 170
Less: Installments Collected & due excluding for
goods repossessed (110+10 – 3x4) = 108

Institute of Lifelong Learning, University of Delhi 37

 Accounting for Hire Purchase System

62
62 @ Rs. 1,000 each = 62,000

VCR
Unit Sold less repossessed x No. of Installment (40+2) x12 = 456
Less: Installments collected & Due excluding for goods
repossessed (260+15 – 2x4) = 267
189
189 @ Rs. 3,000 each 5, 67,000
Total = 62,000+5,67,000= Rs. 6, 29,000
(5) Goods Repossessed
VCP 3 x 10 = 30
Less Collected 3 x 4 = 12
18 @ Rs. 1,000 each = 18,000
VCR 2 x 12 = 24
Less Collected (2 x 4) = 8
= 16 @ Rs. 3,000 each
= 48,000
Total=18,000+48,000 = Rs. 66,000
(6) Stock Reserve on Installments not due
VCP 62,000 x 4,000 = 20,667
12,000
VCR 5, 67,000 x 18,000 = 2, 43,000
42,000
= 2, 63,667

12. Lease
According to AS-19 - A lease is an agreement whereby the lessor conveys to the lessee
in return for a payment or series of payments, the right to use an asset for an agreed
period of time. The fundamental characteristic of a lease is that ownership never passes
to the business customer. Instead, the leasing company claims the capital allowances
and passes some of the benefit on to the business customer, by way of reduced rental
charges .The business customer can generally deduct the full cost of lease rentals from
taxable income, as a trading expense. As with hire purchase, and the business customer
will normally be responsible for maintenance of the equipment.

Lease may be of two types:

 Financial Lease
 Operating Lease

Financial Lease

According to AS-19- A finance lease is a lease that transfers substantially all the risks
and rewards incident to ownership of an asset. The essential point of financial lease
agreement is that it contains a condition whereby the lessor agrees to transfer the title
for the asset at the end of the lease period at a nominal cost. At lease it must give an
option to the lessee to purchase the asset he has used at the expiry of the lease. Under
this lease the lessor recovers 90% of the fair value of the asset as lease rentals and the
lease period is 75% of the economic life of the asset. The lease agreement is
irrevocable. Practically all the risks incidental to the asset ownership and all the benefits
arising there from are transferred to the lessee who bears the cost of maintenance,
insurance and repairs. Only title deeds remain with the lessor. Financial lease is also
known as ‘capital lease’.

The finance lease or 'full payout lease' is closest to the hire purchase alternative. The
leasing company recovers the full cost of the equipment, plus charges, over the period
of the lease. Although the business customer does not own the equipment, they have
most of the 'risks and rewards' associated with ownership. They are responsible for
maintaining and insuring the asset and must show the leased asset on their balance
sheet as a capital item. When the lease period ends, the leasing company will usually
agree to a secondary lease period at significantly reduced payments. Alternatively, if the
business wishes to stop using the equipment, it may be sold second-hand to an
unrelated third party. The business arranges the sale on behalf of the leasing company
and obtains the bulk of the sale proceeds.

Operating Lease

Institute of Lifelong Learning, University of Delhi 38

 Accounting for Hire Purchase System

An operating lease is a lease other than a finance lease. If a business needs a piece of
equipment for a shorter time, then operating leasing may be the answer. The leasing
company will lease the equipment, expecting to sell it secondhand at the end of the
lease, or to lease it again to someone else. It will, therefore, not need to recover the full
cost of the equipment through the lease rentals. This lease agreement gives to the
lessee only a limited right to use the asset. The lessor is responsible for the upkeep and
maintenance of the asset. The lessee is not given any uplift to purchase the asset at the
end of the lease period. Normally the lease is for a short period and even otherwise is
revocable at a short notice. Computers hardware, trucks and automobiles are found
suitable for operating lease because the rate of obsolescence is very high in this kind of
assets with high-cost and high technology. This type of leasing is common for equipment
where there is a well-established secondhand market (e.g. cars and construction
equipment). The lease period will usually be for two to three years, although it may be
much longer, but is always less than the working life of the machine. Assets financed
under operating leases are not shown as assets on the balance sheet. Instead, the entire
operating lease cost is treated as a cost in the profit and loss account.

Financial Lease vs. Operating Lease

Financial Lease Operating Lease

1) Financial lease is long term contract 1) Operating Lease is usually for two or
covering the entire life of an asset. three years, although it may be much
longer, but is always less than the
working life of the asset.
2) Financial lease transfers substantially 2) This lease agreement gives to the lessee
all the risks and rewards incidental to only a limited right to use the asset.
ownership of an asset to the lessee.
3) Under financial lease, lessee is given 3) Under operating lease, lessee is not
option to purchase the asset at the given an option to purchase the asset at
end of the lease period at a nominal the end of the lease period.
cost.
4) The leasing company recovers the full 4) Lease rental from any lessee is not
cost of the equipment, plus charges sufficient to cover the cost of the asset.
over the period of the lease as lease
rental.
5) The lease agreement is irrevocable. 5) The lease agreement is revocable at a
short notice.
6) The lessee is responsible for the 6) The lessor is responsible for the
maintenance, insurance and repairs of maintenance & repairs of the asset.
the asset.
7) The lessee shows the leased asset in 7) Asset financed under operating lease is
his balance sheet as capital item. not shown as asset in the balance sheet
of the lessee and the entire operating
lease cost is treated as a cost in P&L
A/c.

Summary:
 Hire purchase system is a method of buying goods in which the purchaser
takes possession of goods as soon as an initial installment of the price is paid.
 However, ownership is obtained only when all the agreed number of
subsequent installments is paid.
 In case the hirer does not pay any or even the last installment the vendor
gets the right to repossess the goods and forfeit the paid amount as the hire
charge.
 The hire purchase system is governed under the Hire Purchase Act 1972.
 Hire purchase system differs from installment system.
 There are various methods of recording hire-purchase transaction such as;
Full cash price method, Down payment / Accrual method, Debtor
system/Method, Stock & Debtor system/Method etc.

Exercises:
A. Short Answer Questions:

1. Compare the two systems of purchase and Hire Purchase and Installment System.

Institute of Lifelong Learning, University of Delhi 39

 Accounting for Hire Purchase System

2. What do you mean by Goods Repossessed? How they are treated in the books of
Hire Vendor.
3. Differentiate between partial repossession and full repossession from accounting
point of view.
4. Explain the provisions of Hire Purchase Agreement under Hire Purchase Act, 1972.
5. Distinguish between operating lease and finance lease.
6. What is meant by Good Repossessed? How are they treated in the books of
account under stock and Debtors method of Hire Purchase System?
7. Mention the point of difference between the Hire Purchase System and Installment
System: (a) from the legal point of view, and
(b) from accounting point of view.

B. Practical Questions:

1. On 1st Jan 2005, Sapna purchased machinery from Sonu Brothers on hire purchase
basis. The cash price of machine is Rs 25,000. The terms of payment being Rs
10,000 down and balance to be paid in three annual installments of Rs 5,000 each
plus interest @ 10% p.a. Calculate hire purchase price and interest.
2. On 1st April 2005, Neelam purchased a machine on hire purchase basis. The cash
price of the machine is Rs 1, 00,000. The terms of payment being Rs 10,000 down
and the balance in 4 equal installments of Rs 25,000 each payable on 31st march
every year. Neelam charged depreciation @ 20% p.a.
Prepare necessary ledger accounts in the books of Neelam and Hire Vendor.
3. Shyam purchased car on 1st Jan 2005 from Hindustan Motors ltd on hire purchase
basis. He agreed to pay Rs 50,000 on taking delivery of car and pay three annual
installments of Rs 88,000 each. The vendor charged interest @ 10% p.a. Shyam
charged depreciation @ 15% p.a on w.d.v basis. Pass journal entries in the books of
Shyam.
4. On 1st Jan 2007, Sahiba purchased an air conditioner from Neeraj Electronics on hire
purchase basis. The payment is to be made as: Rs 5,000 on delivery and the
balance by following installments on 31st Dec in each year:
2007 Rs 10,000
2008 Rs 10,000
2009 Balance Amount
Neeraj Electronics charged interest @ 10% on the yearly basis. The cash price of air
conditioner is Rs 30,000. Depreciation @ 10% p.a on w.d.v is to be charged. Show
Air conditioner on Hire Purchase Account and Neeraj Electronics Account in the books
of Sahiba.
5. On 1st July 2005, X ltd purchase machinery from Y ltd on hire purchase basis. The
cash price of machine is payable as Rs 20,000 down and the balance in three equal
annual installments together with interest @ 10% p.a. The amount of last
installment including interest was Rs 27,500. Depreciation was to be provided @
10% p.a. on written down value method. Show Machinery Account and Y Ltd Account
in the books of X Ltd.
6. A machinery is sold on hire purchase. The terms of payment are four annual
installments of Rs 6,000 at the end of each year commencing from the date of
agreement. Interest is charged @ 20% and is included in the annual payment of Rs
6,000. Show Machinery Account and Hire Vendor Account in the books of purchaser
who defaulted in the payment of third yearly payment whereupon the vendor
repossessed the machinery. The purchaser provides depreciation on the machinery
@ 10% p.a on w.d.v.
7. On 1st Jan 2006 five trucks were purchased by Naveen on hire purchase system. The
cash price of each truck is Rs 1, 00,000. The payment was to be made as follows:
10% of cash price down
25 % of cash price at the end of each subsequent half years.
The payment due on 31st Dec 2006 could not be made. The vendor seizes all the
trucks, spends Rs 20,000 on their repairs and sells them for Rs 4, 00,000. You are
required to prepare Naveen’s Account and Goods Repossessed Account in the books
HP Vendor and HP vendor’s Account and Trucks on HP Account in the books of
Naveen assuming hire purchaser charges depreciation @ 15% p.a on written down
value method.
8. The Roxy Dry Cleaners purchased from the vendor two machine of Rs 10,000 each
on hire purchase system. The payment was to be made Rs 5,000 down and the
remainder in three equal installments of Rs 5,000 each together with interest @ 5%
p.a. The Roxy Dry Cleaners write off depreciation @ 10% p.a on w.d.v. They could
not pay the second installment. After negotiation it was agreed that the vendor
would have one machine with purchaser adjusting the value of other against amount
due treating the machine @ 20% depreciation on diminishing balance. Show HP
Vendor’s Account and Machinery on HP in the books of Roxy Dry Cleaners.

Institute of Lifelong Learning, University of Delhi 40

 Accounting for Hire Purchase System

9. Transport Ltd. Purchased 2 Trucks costing Rs 1, 60,000 each from Pal Auto Ltd. on
1st Jan 2007. The terms were: Payment on delivery Rs 40,000 for each truck,
remainder in 3 equal installments together with interest at 10% p.a to be paid at the
end of each year. Transport Ltd. Write off 25% depreciation each year on the
diminishing balance method. Transporter Ltd. paid the installment due on
31stDecember, 2007 and 31st December, 2008 but could not pay the final
installment. Pal Auto Ltd repossessed one truck adjusting its value against the
amount due. The repossession was done on the basis of 30% depreciation on
diminishing balance method. Prepare HP vendor’s Account and Trucks on HP Account
in the books of Transport Ltd.
10.ABC Ltd. purchased 2 machines costing Rs 80,000 each from X on 1 stJan, 2005 on
the hire purchase system. The terms were:
Payment on delivery Rs 20,000 for each machine; Balance in 3 equal installments
together with interest at 10% p.a to be paid at the end of each year.
ABC Ltd writes off 25% depreciation each year on the diminishing balance method.
ABC Ltd. could not pay final installment. X repossessed one machine adjusting its
value against the amount due. The repossessed machine was valued on the basis of
30% p.a depreciation on diminishing balance method. The vendor spent Rs 5,000 for
the repairs and sold it for Rs 35,000.
Pass journal entries in the books of X and prepare X Accounts and Machines on HP
Account in the books of ABC Ltd.
11. Mr. Vikram is a hire purchaser trader and sells goods on hire purchase basis at cost
plus 50%. From the following information, prepare Hire Purchase Trading Account to
determine profit for the year ending 31 March 2009:
April, 2008 Rs
Stock with customers (at H.P Price) 45,000
Stock at shop (at cost) 90,000
Installment Due 25,000
Goods Repossessed (installment due Rs 10,000) 2,500
Cash received from customers 3,00,000
March 31, 2009
Stock at shop (excluding repossessed goods) 1, 00,000
Installment due but not received 45,000
Stock with customers at HPP 1,50,000
12.Shyam Brothers have a Hire Purchase department which sells goods at cost plus
50%. From the following information you are required to ascertain the profit made
for the year ended 31st march 2008 using Stock and Debtor Method:
Stock on hire with customer at selling (on 1-4-2007) 54,000
Stock at shop (at cost) on 1-4-2007 1, 08,000
Installment due on 1-4-2007 30,000
Cash received from customer 3,60,000
Goods repossessed (installment due Rs 12,000) 3,000
Installment due from paying customer 54,000
Closing stock at shop (including repossessed goods) 1,23,000
Purchases made in the year 3,60,000
13. Tarun sells goods on hire purchase basis also. He fixes hire purchase price by adding
50% to the cost of the goods to him. The following are the figures relating to his hire
purchase business for the year 2008.
Balance on Hire purchase Stock account on 1-1-2008 24,000
Balance on Hire purchase Debtors account on 1-1-2008 600
Selling price of the goods sold on hire purchase 1, 81,200
Cash Received from Customers 1, 84,800
Total amount of installments that fell due during the year 1, 85,400
One customer to whom goods had been sold for Rs 2,400 paid only three
installments of Rs 200. On his failure to pay the monthly installment of Rs 200 due
on 4 December, 2008 the goods were repossessed on 28-12-2008 after legal notice.
14. Ramesh Ltd. Sells a product on hire purchase basis. It has the following transactions
for the year ending 31st March 2010.
2009, April 1 Rs
Stock out on hire at hire purchase price 60,000
Stock at hand (at shop) 7,500
Installment due (Customers still paying) 4,500
2010, March 31
Stock out on hire at hire purchase price 69,000
Stock at hand (at shop) 10,500
Installment due 7,500
Cash received during the year 1, 20,000
The business follows the practice of charging gross profit at 25% of selling price.
Prepare necessary ledger accounts to record these transactions in the books of the
Ramesh Ltd in a manner as to show the cost of purchase made and profit earned
during the year.

Institute of Lifelong Learning, University of Delhi 41

 Accounting for Hire Purchase System

15.The Hire Purchase department of Naveen Electronics sells TV and coolers on hire
purchase basis. The relevant information for the year ended 31 st March 2008 is as
follows:
TV Cooler
Rs Rs
Cost 5,400 2,000
Cash price 6,300 2,400
Cash down payment 900 400
Monthly installment 600 200
No of installments 10 12
During the year, 200TV and 240 coolers were sold on hire purchase basis.4 TV on
which 3 installments only could be collected and 8 coolers on which 5 installments
had been collected were repossessed. These were valued at Rs 20,000, after
reconditioning at cost of Rs 2,000; they were sold outright for Rs 28,000. Other
installments collected and those due were respectively as follows:
TV 540 and 40
Coolers 800 and 60
Prepare accounts on Stock and Debtors system to reveal profit of the department.

Answers to Practical Questions:

1: HPP=Rs 28,000, Interest=Rs 3,000;

2: Interest, I=Rs4, 000, II=Rs3, 000, III=Rs2, 000, IV=Rs1, 000;
3: Cash Price=Rs 2, 68,843, Interest, I=Rs 21, 884, II=Rs 15,273, III=Rs 8,000);
4: Balance Installment=Rs 10,175;
5: Cash Price= Rs 95,000, Installment, I=Rs 32,500, II=Rs 30,000, III=Rs 27,500;
6:Cash Price=Rs 15,532, Interest, I=Rs 3,107, II=Rs 2,528, III=Rs 1,833, IV=Rs
1,000, Loss on Repossession=Rs323;
7: Loss on Repossession=Rs 65, 000, Profit on Resale=Rs 20,000;
8: Loss on Repossession=Rs 1,700;
9: Loss on Repossession=Rs12, 620, value of Truck Repossessed=Rs54,880;
10: Loss on Repossession=Rs6, 310, Profit on Sale=Rs2,560;
11: Profit=Rs1,02,500;
12: Profit=Rs1,23,000;
13: Profit=Rs62,334;
14: Profit=Rs30,750;
15: Profit=Rs2,00,057.

References:
1. Work Cited and Suggested Readings:

Anthony, R.N., and J.S. Reece, “Accounting Principles”, Richard D Irwin. Inc.
 Monga, J.R., “Financial Accounting: Concepts and Applications”, Mayoor Paper
Backs, New Delhi.
 Shukla, M.C., T.S. Grewal and S.C. Gupta, “Advanced Accounts”, Vol-I, S. Chand
& Co., New Delhi.
 Gupta, R.L., and M. Radhaswamy, “Advanced Accountancy”, Vol-I, Sultan Chand
& Sons, New Delhi.
 Maheshwari, S.N. and S.K. Maheshwari, “Financial Accounting”, Vikas Publishing
House, New Delhi.
 Sehgal, Ashok, and Deepak Sehgal, “Advanced Accounting”, Part-I, Taxmann
Applied Services, New Delhi.
 Tulsian, P.C., “Advanced Accounting”, Tata McGraw Hill, New Delhi.
 Jain, S.P., and K.L. Narang, “Financial Accounting”, Kalyani Publishers, New
Delhi.
 Gupta, Nirmal, “Financial Accounting” SahityaBhawan, Agra.
 “Compendium of Statements and Standards of Accounting”, The Institute of
Chartered Accountants of India, New Delhi.

Institute of Lifelong Learning, University of Delhi 42