UNIT 2

HIRE PURCHASE AND INSTALLMENT SYSTEM

BY
PROF. SUKU THOMAS SAMUEL
DEPARTMENT OF MANAGEMENT
KRISTU JAYANTI COLLEGE AUTONOMOUS
 HIRE PURCHASE
Introduction
• Hire purchase system refers to the system wherein, the seller of goods
delivers the goods to the buyer without transferring the ownership of
goods.
• The payment for the goods will be made by the buyer in parts.
• If the buyer pays the all the installments, the ownership of the goods will
be transferred, on payment of the last part payment.
• If the buyer does not pay for any installment, the goods will be
repossessed by the seller and the money paid in earlier installments will
be treated as hire charges for using the goods.
• Hence, the system is called Hire Purchase System.
 FEATURES OF HIRE PURCHASE
• Hire purchase is an agreement between two parties called Hire
vendor and Hire purchaser
• Payment is made in parts.
• Ownership remains with the seller.
• Ownership is transferred after complete payment.
• Seller can take back goods if buyer defaults payment.
 SALE HIRE PURCHASE
Payment is made lumpsum. Payment is made in parts
Ownership and possession is transferred Possession is transferred immediately.
immediately.
Ownership is with buyer. Ownership remains with seller until last
payment.
Seller cannot take back the goods after the Seller can take back the good on
transaction. nonpayment of part.
Method of selling a product. Method of hiring a product.
Buyer cannot terminate the transaction after Buyer can terminate the agreement before
execution. the completion of last payment.
Regulated by Sale of Goods Act 1930. Regulated by Hire Purchase Act 1972.
 IMPORTANT TERMS

Hire seller/Hire vendor/Owner

A person who sells the goods to the buyer under hire purchase system is known as
hire seller.
Hirer/Hire purchaser/Hire buyer
The person who purchase goods from hire vendor or who obtains the goods from
an owner under hire purchase agreement is known as hirer.
Cash price/Cash value
It is a value of goods at which the goods may be purchased by the hirer for cash.
Down Payment
The initial cash payment made by the hire purchaser to the vendor at the time of
signing the hire purchase agreement is referred as down payment.
 IMPORTANT TERMS

Hire Purchase Price

The hire purchase price includes the cash price and interest to be paid on the future
parts. It is the total sum payable by the hirer to the vendor.
Hire Purchase Charge
The difference between the hire purchase price and the cash price as stated in the
hire purchase agreement is known as hire purchase charge. It also referred to as
interest
Installment Money/ Part money
It refers to a part of Hire purchase price paid by the hire purchaser in periodic
intervals.
 REBATE IN HIRE PURCHASE
Rebate
The hirer can claim rebate from the owner or hire vendor in case he decides remit the balance
of the purchase price in lump sum without continuing the hire purchase agreement till the last
date stipulated.
 •Hirepurchaser can terminate agreement before its end.
•Termination must be mutually agreed between the vendor & purchaser.
•The outstanding amount must be settled in lumpsum.
Settlement amount = Total amount outstanding – Rebate

Rebate *
Hire charges = Hire purchase price – Cash price
 REBATE – QUESTION 1

The cash price of a good is Rs 24,000. The total hire purchase price is
Rs 30,000. The agreed number of installments is 30. After paying 12
installments, the purchaser would like to pay the amount in lumpsum.
Calculate the total amount payable.
 REBATE – QUESTION 2

The cash price of a good is Rs 48,000. The hire purchase price is Rs

52,000. The total number of installments is 20. The number of
installment paid is 14. Calculate the amount payable by the purchaser
if he wishes to settle the balance amount in lump sum.
 REBATE – QUESTION 3

The cash price of a good is Rs 30,000. The hire purchase price is Rs

39,000. The total number of part payments is 13. The number of
installments paid is 5. Calculate the rebate amount and the balance
amount payable if purchaser wishes to close the hire purchase.
 Beginning of First Year
1. When asset is purchased on hire purchase system
No Entry
2. When the down payment is made
Asset A/C Dr
To Bank A/C
End of First Year
3. When the installment Become due
Asset A/C Dr
Interest A/C Dr
Journal Entries – In the book of Hire To Hire Vendor A/C
Purchaser 4. When Installment is Paid
Hire Vendor A/C Dr
To Bank A/C
5. When depreciation is charged
Depreciation A/c Dr
To Asset A/C
6. When Interest & Depreciation transferring to P/L
P/L A/C Dr
To Depreciation A/C
To Interest A/C
 QUESTION

Mr. Ashok purchased a machine on hire purchase from Bharat Motors on 1

Jan 2016. The cash price of the machine was Rs 74,500 and the payment was
made as follows:
• Rs 20,000 was paid on signing the agreement.
• Balance is payable in 3 parts of Rs 20,000 annually.
• Interest is charged at 5%
• Depreciation is calculated at 10% according to straight line method.

Prepare the journal entries for the transaction

 QUESTION
ABC purchased a minibus costing Rs 1,60,000 from XYZ Ltd under
hire purchase on 1 Jan 2015. An amount of Rs. 40,000 was payable on
entering the agreement and the balance in 3 parts of Rs. 50,000 each at
the end of the year. Depreciation is charged at 10% p.a. on written down
value method. Show the necessary journal and ledger accounts in the
book of the purchaser under Asset Accrual Method.
 QUESTION
Mr. ABC purchased a trucks on hire purchase system from M Ltd on 1 Jan
2010.
• The details of the transaction are as follows:
• The cash price of the trucks is Rs. 56,000
• On signing of the agreement Rs. 15,000 was paid.
• Balance was paid in 3 installments of Rs. 10,000 each at the end of each year.
• 5% interest is charged by the vendor.
• Depreciation is charged at 20% annually on the reducing balance method

Prepare the necessary journal entries for the transaction.

 QUESTION
On 1 April 2011 Bhaskar purchased a machine from Ravi Ltd on hire
purchase. The particulars are as follows:
• Cash Price Rs. 1,00,000.
• Rs. 40, 000 was paid on signing the contract.
• Balance in paid in three instalment of Rs. 20,000 plus interest
• Interest charged on outstanding balance at 5%.
• Depreciation at 10% p.a. on written down value method

Draft the necessary journal entries in the book of Mr. Bhaskar under asset
accrual method
 QUESTION
PQRS Cabs decided to buy a car on hire purchase from TATA Motors.
• The agreement was signed on 1st January 2016 and is for 2 years.
• The cash price of the car is Rs 14,87,000.
• The part payment of Rs 4,00,000 is to be made half yearly.
• TATA Motors is charging interest at 6% p.a.
• The company has decided to charge depreciation at 10% according to
straight line method.
Prepare the journals of PQRS cabs for this transaction.
 QUESTION
On 1 Jan 2016, ABC purchased a machine from HMT Ltd of hire
purchase. The details of the transaction are as follows:
• Cash price is Rs 1,00,000.
• Rs 40,000 was paid while signing the agreement.
• Balance is settled in 3 parts of Rs 20,000 plus interest.
• Interest is charged at 5%.
• Depreciation is charged at 10% according to written down value
method.
Prepare the journal entries for the above-mentioned transaction.
INSTALLMENT PURCHASE

BY
SUKU THOMAS SAMUEL
DEPARTMENT OF MANAGEMENT
 INSTALLMENT PURCHASE
Installment purchase is a system of purchase where buyer is given
ownership and possession of the good at the time of executing the
transaction and the payment is made in parts.

“Installment Purchase System is a system under which there is

an agreement to purchase and pay by installment, the goods
which becomes the property of the purchaser immediately when
he receives the delivery of the good.”
- JB Batliboi
 INSTALLMENT PURCHASE
Features of Installment Purchase:
• Payment in made in parts.
• Possession in transferred immediately.
• Ownership in transferred immediately.
• If buyer defaults payment, seller cannot take back the goods.
• Seller can take legal actions against buyer.
• Buyer cannot cancel the agreement and return good before
completion of the part payments.
 HIRE PURCHASE INSTALLMENT PURCHASE
Method of hiring a product. Method of selling a product.
Ownership remains with seller until last Ownership and possession is transferred
payment. immediately to the buyer.
Seller can take back the good on Seller cannot take back the good on
nonpayment of part. nonpayment of part.
Buyer can terminate the agreement before Buyer cannot terminate the agreement
the completion of last payment. before the completion of last payment.
Risk of loss and damage of good is on Risk of loss or damage of goods in on
seller. buyer.
Buyer cannot resell the good before Buyer can resell the good before the
completion of payment. completion of payment.
Regulated by Hire Purchase Act 1972. Regulated by Sale of Good Act 1930.
 INSTALLMENT PURCHASE

Interest Suspense Method

The method of accounting used for the treatment of the
Installment purchase transactions into books of accounts.
 QUESTION
On 1st January 2012, OM Oil company purchased an oil machine on the
installment System. The cash price of the machine was Rs 11,175 and
payment was to be made as follows:
• Rs. 3,000 was to be paid on the signing of the agreement
• Balance in three installments of Rs. 3,000 each at the end of each year.
• 5% interest is charged by the seller.
• OM oil company had decided to write off 10 per cent annually on the
diminishing balance method.

Prepare the journal entries and in the books of purchaser.

 QUESTION
On 1st Jan 2012 M Ltd. acquired a machine on instalment purchase. The
terms of the contract were as follows:
• Cash price of the machine was Rs. 50,000
• Rs. 20,000 were to be paid on the signing of the contract.
• Balance was to be paid in three annual instalments of Rs. 10,000 plus
interest at 10% per annum.
• Depreciation at 10% per annum is to be written off based on the straight-
line method.
You are required to show the necessary ledger accounts in the books of the
buyer.
 QUESTION

Mr. X bought a smart television from Reliance Digital on installment. The

cash price of the television is Rs 89,400. Rs 24,000 is paid at the time to
signing up for the deal. The balance is agreed to be paid in 3 installments
of Rs 24,000. Reliance Digital is charging an interest for 5% and Mr. X has
decided to charge depreciation at 10% based on straight line method. Pass
the necessary journal entries for Mr. X
 QUESTION
Mr. Rajiv bought a Motor Car on 1 April 2016 under hire purchase. The term
of the purchase are as follows:
• Rs. 2,000 to be paid on signing the agreement
• Rs. 2,800 at the end of the 1st Year
• Rs. 2,600 at the end of the 2nd Year
• Rs. 2,400 at the end of the 3rd Year
• Rs. 2,200 at the end of the 4th Year
If the interest is charged at the rate of 10% p.a. what will be the cash price of
the Motor Car? Show the necessary journal entries if the rate of depreciation
is 20% p.a. on reducing balance method