Accounting For Hire Purchase In The Purchaser’s Book

This article deals the Accounting treatment of Hire Purchase Agreement of Purchaser:

In the Purchaser’s Books

Goods on hire purchase are treated as Assets upon receipt. The cash price is recorded as Cost of Assets re: Fixed Assets and

The interests on hire purchase are charge to the Profit & Loss account as revenue expenditure over the period of the Hire Purchase Agreement

Accounts Required in The Purchaser’s Books:

Double entries:

(a) Debit :Asset Account

Credit: Hire Purchaser Company Vendor A/c

[ with the cash price of asset ]

(b) Debit: HP Interest Suspense A/c

Credit: Hire Purchaser Company Vendor A/c

[ with the total hire purchase interest ]

Credit: Bank A/c

[ payment of deposit and installment paid ]

(d) Debit : Profit & Loss a/c

Credit: HP Interest Suspense A/c

[ interest written off in the period ]

Various Accounts Items

1. Asset Account

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

2. Hire Purchase Company Vendor A/c

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

3. Hire Purchase Interest Suspense A/c

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

Share and Enjoy:

3 Responses

soowm - December 13, 2007

With the popularity of operating lease. Hire Purchase will be very rare going forward. Nowdays even leasehold land cannot be classified as asset, but prepaid lease
Mortgage Claims - February 16, 2008

Well…
The Hire Purchase will be very rare going forward. Nowdays even leasehold land cannot be classified as asset.
Mortgage Claims - February 16, 2008

Well..
The Hire Purchase will be very rare going forward. Nowdays even leasehold land cannot be classified as asset.