Hire-Purchase Accounts -

Hire-Purchase System

Hire-Purchase system refers to a transaction method of sales where some amount of cash is paid on signing the contract (called down payment or spot payment), and the balance payment and interest thereon will be made in instalments to vendor. Under Hire Purchase system, the customer (hire purchaser) obtains possession of the goods at the outset on down payment and further instalments over an agreed period of time. When all instalments would have been paid, the right of ownership will be transferred from seller or vendor to the hire purchaser.

Terms used in Hire-Purchase

Hire Vendor- Who sales goods (i.e. the seller) under hire-purchase system.
Hire-Purchaser- To whom the goods are delivered or sold.
Cash Price- It is the amount for which goods can be purchased immediately by making a lump sum payment at a time.
Hire Purchase Price- It includes the cash price and the amount of total interest (also called finance charge) to be paid under hire purchase system. Thus Hire purchase price = Cash Price + Interest charged + charge to cover risk (in case of default in payment or return of goods in a damaged condition).
Down Payment- It is the amount paid on signing the hire purchase agreement.

Features of Hire-Purchase System

Nature of Agreement: A hire purchases agreement is a contract of bailment coupled with an option to the hire purchaser to acquire the goods delivered to him under such an agreement.
1. Ownership & Possession: The possession of the goods and not their ownership is transferred to the hire-purchaser. The Goods remain the property of the vendor until all the instalments have been paid, and if default is made in payment of instalment by the hire-purchaser the vendor has the right to retake possession of the goods.
1. Right of Purchaser: The hire-purchaser has right to terminate the agreement. If he so desires (not to pay all instalments), the hire-purchase agreement may be cancelled and the goods returned but vendor will forfeit the instalments paid till then, treating them as hire-charges. So, the hire-purchaser can not sell the goods to a third party.
1. Responsibility: The hire-purchaser has responsibility for keeping the goods in good condition so long as they remain the property of the vendor and as the vendor retains the ownership of goods, he (vendor) must get them insured against loss or damage.
1. Right and Option: In the event of a default of instalments, if the vendor is not able to recover back the goods, he may bring legal action against the purchaser for the recovery of the part of the goods.
1. Price to be paid: Under this system the price to be paid (hire-purchase price) for goods is more than the cash price. The hire-purchase price includes the cash price plus interest on unpaid balance plus usually an additional amount to cover the risk of default.

Difference between Hire-Purchase and Credit Sales

A contract of hire-purchase differs from a contract of credit sale in the following ways:

Basis of difference	Hire Purchase System	Credit sales
1. Nature of agreement	Hire Purchase is a contract of hiring coupled with an option to purchase.	In case of credit sale, there is no hiring even if purchase price is paid in instalment.
2. Transfer of title	In case of hire purchase, the hire purchaser has no right of ownership of goods and therefore he is not able to give good title to subsequent transferee.	In case of a contract of sale a person has ownership rights over the goods and can transfer these to another person.
3. Repossession	If the agreement is broken, the owner of the goods (vendor) can repossess it and sue for due instalments.	If the agreement is broken, the seller can only sue for the unpaid instalments, but can not repossess the goods.

Accounting Treatment

Accounting Treatment can be divided on the basis of interest calculation and cash price as follows:

Calculation of Interest,
Calculation of Cash Price.

Calculation of Interest

Hire Purchase price includes the cash price and the amount of interest payable. So, the total payment made under hire-purchase is more than cash price. It is necessary to calculate interest because the amount paid for interest is charged to revenue and the asset is capitalized only at the cash-price.

In case of calculation of interest, two situations may arise:

When cash price and rate of interest are known,
When rate of interest is not given.

Calculation of interest when cash price and rate of interest are known

It is simple if the cash price and the rate of interest are given. Two situations may arise:

When interest is included in the amount of instalments,
When interest is not included in instalments.

When interest is included in the amount of instalments

When the hire-purchase price or total of all instalments including down payment exceeds cash price, it is regarded that interest is included in instalments at given rate on amount of cash price outstanding.

Ex. Cash price of asset purchased on hire-purchase system Rs.75,000. Down payment Rs.10,000. Instalments : 5 Annual Instalments of Rs.15,000 each. Rate of interest: 5% pa. Calculate interest included in each instalment.

Solution:

		Cash value	Instalment
Principal	Interest
Rs.	Rs.	Rs.
	Rs.	75,000
Less: Paid on delivery (Down Payment)		10,000	10,000	–
		65,000
First Instalment	15,000
Less: Interest @ 5% on Rs.65,000	3,250
Principal	11,750	– 11,750	11,750	3,250
		53,250
Second Instalment	15,000
Less: Interest @ 5% on Rs53,250	2,662
Principal	12,338	– 12,338	12,338	2,662
		40,912
Third Instalment	15,000
Less: Interest @ 5%on Rs 40,912	2,046
Principal	12,954	– 12,954	12,954	2,046
		27,958
Fourth Instalment	15,000
Less: Interest @ 5% on Rs.27,958	1,398
Principal	13,602	– 13,602	13,602	1,398
		14,356
Fifth Instalment	15,000
Less: Amount unpaid	14,356	14,356	14,356	644
Interest	644
Total		–	75,000	10,000

When interest is not included in instalment

Where total of instalments given price is equal to cash price, it will be regarded that interest is paid in additional to stated amounts of instalments.

Ex. On1st January 2008, XYZ Ltd. purchased a machinery on hire-purchase basis, cost price of which is Rs.80,000, Rs.20,000 was paid as down payment on signing of the contract and balance in three annual instalments of Rs.20,000 each on 31^st December. Further, an addition interest @ 7.5% p.a. was also payable to vendors on outstanding balances.

Calculate the amounts of interest and instalments.

Solution:

Calculation of Interest

Particulars		Cash price	Instalments
Principal Rs.	Interest Rs.	Total payment Rs.
Cash price of machinery		80,000
Less: Down payment		20,000	20,000	–	20,000
		60,000
First Instalment	20,000
Add: Int. on Rs.60,000 @ 7.5%	4,500
Total	24,500	(20,000)	20,000	4,500	24,500
		40,000
Second Instalment	20,000
Add: Int. on Rs.40,000 @ 7.5%	3,000
Total	23,000	(20,000)	20,000	3,000	23,000
		20,000
Third Instalment	20,000
Add: Int. on Rs.20,000 @ 7.5%	1,500
Total	21,500	(20,000)	20,000	1,500	21,500
	Total	Nil	80,000	9,000	89,000

Calculation of Interest when rate of Interest is not given

The problem of calculation of interest where rate of interest is not given may be two kinds-

When cash price and amounts of instalments are given and
When only amounts of instalments are given and cash price is not given.

When cash price and amounts of instalments are given : In this situation amount of total interest should be calculated by taking difference between total of all instalments and total cash price. Interest included in each instalment may be calculated in the ratio of amount outstanding.

When interest rate is not given

Ex. Calcutta Transport Ltd. purchased a vehicle on hire-purchase system on 1^st January, 2008 Rs.15,000 was paid at spot and rest was paid by four equal half yearly instalments of Rs.20,250 each. The cash price of vehicle was Rs.90,000. Find out the amount of interest included in each instalment.

Solution: Steps involved in showing the above problem:

Calculation of total interest.
Statement showing distribution ratio of interest in each instalment.
Analysis of instalments principal and interest.
Computation of total interest

	Rs.
Hire-purchase price [Rs.(15,000+20,250 x 4)] Less: Cash price	96,000 90,000
Total Interest	6,000

Out of the total amount of Rs.96,000, payable Rs.15,000 down payment was made. So, the balance amount payable is Rs.81,000.

Statement showing distribution of interest in each instalment

Instalments	Amounts Outstanding	Shares of Interest (out of total shares)	Ratio	Interest Rs.
First Instalments Second Instalments Third Instaments Fourth Instalments	81,000 60,750 40,500 20,250	4 3 2 1	4/10 3/10 2/10 1/10	6,000 x 4/10 = 6,000 x 3/10 = 6,000 x 2/10 = 6,000 x 1/10 =	2,400 1,800 1,200 600
Total shares 10		6,000

Analysis of Instalments Principal and Interest

Instalments	Rs.	Principal (Rs.)	Interest (Rs.)
(1)	(2)	3 = (2-4)	(4)
Down Payment First Payment Second Payment Third Payment Fourth Payment Total	15,000 20,250 20,250 20,250 20,250	15,000 17,850 18,450 19,050 19,650	– 2,400 1,800 1,200 600
96,000	90,000	6,000

Alternatively, interest may be allocated in the ratio of average amount outstanding. Calculations as per this method will be as under:

Instalments	Average Amount outstanding	Ratio	Interest (Rs.)	Interest (Rs.)
I^st Instalment II^nd Instalment III^rd Instalment IV^th Instalment	(81,000+60,750) /2 = 70,875 (60,750+40,500) /2 = 50,625 (40,500+20,250) /2 = 30,375 (20,250+0) /2 = 10,125	7 5 3 1	6,000 x 7/16 = 6,000 x 5/16 = 8,000 x 3/16 = 6,000 x 1/16 =	2,625 1,875 1,125 375

Note: Ratio of average amount outstanding = (70,875 : 50,625 : 30,375 : 10,125) = 7:5:3:1

When amounts of instalments are given but cash price is not given : Where cash price is not known, the calculation of interest will be based on assumption that portions of cash price included in the instalments are equal.

Rate and cash price not given

M/S. Tours & Travels Pvt. Ltd. sells a vehicle on hire-purchase system. The terms of payment for the sale of the vehicle is Rs.10,000 on delivery, Rs.10,400 at the end of first year, Rs.9,600 at the end of the second year and Rs.8,800 at the end of the third year, inclusive of finance charges (or interest). Calculate amount of interest included in each instalment.

Solution:

Let, the portion of cash price included in instalment is equal and it is P. The portion of interest is taken as I:

First Instalments	P + 3 I	=	10,400	..	(i)
Second Instalments	P + 2 I	=	9,600	..	(ii)
Third Instalments	P + I	=	8,800	..	(iii)
	2P + 3I	=	18,400	..	(ii) + (iii)
	P + 3I	=	10,400	..	(i)
On deduction	P	=	8,000

Instalments	Amt. of Instalments (Rs.)	Principal (Rs.)	Interest (Rs.)
(1)	(2)	(3)	(4) = (2) – (3)
Down Payment First Instalment Second Instalment Third Instalment	10,000 10,400 9,600 8,800	10,000 8,000 8,000 8,000	— 2,400 1,600 800
Total	38,800	34,000	4,800

Calculation of Cash Price

Sometimes cash price of goods is not given and only instalment with interest & hire-purchase price is given. Under such a situation, calculate the cash price to find out amount of interest included in each instalment.

For computation of cash price, Annuity Tables may be used. Otherwise, arithmetical method is used.

Cash price can be calculated under different situation:

Under Annuity Method,
Under Arithmetical Method,
When instalments are payable at the end of half of year,
When instalments are annual,
When instalments are payable at the end of two years & interest is charged on two yearly rests,
When instalments are payable at the end of two years & interest is calculated on yearly rests.

Ex. On 1^st January 2008, India travels Ltd. on hire-purchase basis, purchased a car for Rs.90,000 payable in three equal annual instalments combining principal and interest, the rate of interest was 5% p.a.

Calculate the amount of cash selling price and interest. The present value of an annuity of one rupee for three years at 5% is Rs.2.72325.

Solution: Steps involved in solving the above problem:

Calculation of Cash Price.
Calculation of Interest.
Calculation of Cash Price:

The present value of annuity of Re.1 paid for 3 years @ 5% = Rs.2.72325.

So, the present value of Rs.30,000 for 3 years = Rs. (30, 000 x 2.72325) = Rs.81,698 (approx).

Then, cash price = Rs.81,698.

Calculation of Interest

Particulars		Cash Value (Rs.)	Instalment
Rs.		Principal Rs.	Interest Rs.
First Instalment Less: Int. (@ 5% on Rs.81,698) Principal Second Instalment Less: (Int. @ 5% on Rs. 55,783) Third (Final ) Instalment Less: Amount unpaid	30,000 4,085	81,698 25,915	25,915 27,211 28,572	4,085 2,789 1,428
25,915
30,000 2,789	55,783 27,211
27,211
30,000 28,572	28,572 28,572
1,428
		81,698	8,302

Calculation of Cash Price under Arithmetical Method

First take the last instalment and calculate interest included in the instalment.

Interest = Amount of instalments x {Rate of interest / (100 + Rate of interest)}

Then, interest on last but one instalment + principal or cash price in last instalment should be calculated using above formula.
Interest in all other instalments should be calculated using above method.

Ex. A acquired on 1^st January ,2003 a machine under a Hire-Purchase agreement which provides for 5 half-yearly instalments of Rs.6,000 each, the first instalment being due on 1^st July, 2003. Assuming that the applicable rate of interest is 10 per cent per annum, calculate the cash value of the machine. All working should form part of the answer.

Solution:

Particulars	Instalments Amount	Interest @ 5% half yearly (10% p.a.) = 5/105 = 1/21 (in each instalment)	Principal Amount (in each instalment)
	Rs.		Rs.	Rs.
5^th Instalment	6,000
Less: Interest	286	(6,000/21)	286	5,714
	5,714
Add: 4^th Instalment	6,000
Less: Interest	11,714 558	(11,714/21)	558	(11,156-5,714)=5,442
Add: 3^rd Instalment	11,156 6,000
Less: Interest	17,156 817	(17,156/21)	817	(16,339-11,156)= 5,183
Add: 2^nd Instalment Less: Interest	16,339 6,000	(22,339/21)	1,063	(21,276-16,339)= 4,937
22,339 1,063
Add: 1^st Instalment	21,276 6,000
Less: Interest	27,276 1,299	(27,276/21)	1,299	(25,977-21,276)= 4,701
25,977		4,023	25,977

The cash purchase price of machinery is Rs. 25,977.

Ex. X Ltd. purchased a machine on 1st January 2008 on hire-purchase system. He paid Rs.10,000 at spot and then two annual instalments of Rs.10,000 each. The rate of interest was 5% per annum.

Calculate the amount of interest included in instalments and cash price of the machine.

Solution:

Calculation of Cash Price

Particulars	Rs.	Instalment
Principal Rs.	Interest Rs.
Second Instalment Interest = Rs.10,000 x 5/105 = Principal = Rs. (10,000 – 476)= First Instalment Upto date outstanding amount Total = Rs. (10,000 + 9,524)= Interest = Rs. 19,524 x 5/105= Principal = Rs. (10,000 – 930)= Down payment	10,000 476 9,524 10,000 9,524 19,524 930 9,070	9,524 9,070 10,000	476 930
28,594	1,406

Calculation of Hire-Purchase Price

	Rs.
Total Cash price Total Interest Hire-Purchase Price	28,594 1,406
30,000

Ex. Joint venture Ltd. purchased an asset on hire-purchase system, by paying Rs.2,000 down and Rs.2,500 each at the end of 2^nd, 4^th and 6^th year. Interest is charged @ 5% p.a. on two yearly rests. Calculate Cash Price and amount of interest included in each instalment.

Solution:

Particulars		Instalment
Principal Rs.	Interest Rs.
Third Instalment Interest = Rs. 2,500 x 10/110 Principal = Rs.(2,500 – 227) Second Instalment Upto date outstanding amount Total = Rs.(2,273 +2,500) Interest = Rs. 4,773 x 10/110 Principal = Rs. (2,500 – 434) First Instalment Upto date outstanding amount = Rs.(2,273 + 2,066) Total = Rs. (4,339 + 2,500) Interest = Rs. 6,839 x 10/110 Principal = Rs. (2,500 – 622) Down payment	Rs. 2,500 = Rs. 227 = Rs. 2,273 Rs. 2,500 = Rs. 2,273 = Rs. 4,773 = Rs. 434 = Rs. 2,066 Rs.2,500 = Rs. 4,339 = Rs. 6,839 = Rs. 622 = Rs. 1,878	2,273 2,066 1,878 2,000	227 434 622
8,217	1,283

Ex. S.K. Mittal purchased an asset on hire-purchase system. He paid Rs.3,400 down and Rs.12,000 in three instalments of Rs.4,000 each at the interval of two years. Hire-vendor charges interest at 10% p.a. on yearly rests.

Solution:

Calculation of Cash Price

	Rs.
Principal Interest for 1^st year (Rs.100 x 10%) Interest for 2^nd year (Rs.110 x 10%) Instalment	100 10
110 11
121

Therefore, total interest for two years = Rs. (10+11) = Rs.21.

Particulars		Instalment
Principal Rs.	Interest Rs.
Third Instalment Interest = Rs. 4,000 x 21/121 Principal = Rs. (4,000 – 694) Second Instalment Upto date outstanding amount Total = Rs.(3,306 + 4,000) Interest = Rs. 7,306 x 21/121 Principal = Rs. (4,000 – 1,268) First Instalment Upto date outstanding amount Rs.(3,306 + 2,732) Total = Rs. (6,038 + 4,000) Interest = Rs. 10,038 x 21/121 Principal = Rs. (4,000 – 1,742) Down payment	Rs. 4,000 = Rs. 694 = Rs. 3,306 Rs. 4,000 = Rs. 3,306 = Rs.7,306 = Rs. 1,268 = Rs. 2,732 Rs. 4,000 = Rs. 6,038 = Rs. 10,038 = Rs. 1,742 = Rs. 2,258	3,306 2,732 2,258 3,400	694 1,268 1,742
11,696	3,704

Hire Purchase Accounting Method

The method of accounting for hire-purchase transaction depends on the value of sales.

In case of substantial sale value of goods, the accounting method may be-
Assets Accrual Method,
Total Asset value Method/Cash Price Method,
Interest suspense Method.
In case of small sale value of goods, hire-purchase accounting method may be-
Debtors Method,
Stock and Debtors Method.

Transactions in case of substantial sale value of goods

In case of substantial sale value of goods, transaction entries are recorded in the books of

Hire Purchaser,
Hire Vendor.

Entries in the books of the Hire-Purchaser

There are three methods of recording hire-purchase transactions in the books of the hire purchaser-

Assets Accrual Method,
- Total Assets Value Method,
- Interest Suspense Method.
Assets Accrual Method: Under this method, the assets account is debited at the time of payment of each instalment, towards principal (i.e. cash price) and interest account is debited with the amount of interest paid included in the instalment. Depreciation will be charged on total cash price. The interest account and depreciation account will be closed by transfer to Profit and Loss Account.

The balance of asset account will appear in the Balance Sheet as ‘Asset (on hire-purchase) less depreciation.’

Total Asset Method: Under this method, the total cash price of the asset is debited to the asset account and credited to vendor’s account as if it were an outright purchase. The periodical interest is debited to interest account and credited to vendor’s account. Vendor’s Account is debited with all cash payments made. Depreciation will be charged on total cash price. The interest account and depreciation account will be closed by transfer to Profit and Loss Account.

In the Balance Sheet, the asset account is shown by the balance in Asset Account (i.e. total cash price less depreciation) and the outstanding credit balance in the Vendor’s Account will be deducted therefrom.

Interest Suspense Method

Under this method full cash price of the asset and total amount of interest payable are debited to Asset Account and Interest Suspense Account respectively and Vendor’s Account is credited with total amount of all instalments payable. At the end of each year the interest accrued in that year is debited to Interest Account and credited to Interest Suspense Account. Depreciation is charged on total cash price and Interest Account and Depreciation Accounts are transferred to Profit and Loss Account. Asset Account will be shown in the Balance Sheet as shown under Total Assets Value Method. The balance in Interest Suspense Account will represent a debit balance and hence be shown on the Asset side of the Balance Sheet.

The Journal Entries in the books of the Hire-Purchaser under different methods is shown below:

Events	Under Asset Accrual Method	Under Total Asset Method	Under Interest Suspense Method
On agreement/on the date of purchase	No entry	Assets A/c ..Dr. To Hire Vendor A/c (Full cash price)	Asset A/c ..Dr. Interest Suspense A/c. ..Dr. To Hire Vendor A/c (Amount of total cash price and total interest payable)
On down payment made	Asset A/c ..Dr. To Bank/Cash	Hire Vendor A/c Dr. To Bank/Cash	Hire Vendor A/c ..Dr To Bank/Cash
At the end of the 1^st year:
When instalment is due (including interest)	Asset A/c ..Dr. Interest A/c ..Dr. To Hire Vendor A/c. (Amount of cash price portion and interest included in the instalment	Interest A/c .. Dr. To Hire Vendor A/c (Amount of interest included in the instalment)	Interest A/c ..Dr. To Interest Suspense A/c (Amount of interest included in the instalment)
When Annual Instalment is paid	Hire Vendor A/c ..Dr. To Bank/Cash	Hire Vendor A/c Dr To Bank/Cash	Hire Vendor A/c ..Dr. To Bank/Cash
For charging depreciation at the end of the year	Depreciation A/c ..Dr. To Asset A/c	Depreciation A/c ..Dr. To Asset A/c	Depreciation A/c ..Dr. To Asset A/c
For transfer of interest and depreciation to Profit and Loss A/c at the end of the year.	P & L A/c Dr. To Interest A/c To Depreciation A/c	P & L A/c Dr. To Interest A/c To Depreciation A/c	P & L A/c ..Dr. To Interest A/c To Depreciation A/c

Note: In the subsequent years, entries (c.), (d.), (e.), (f.)will be repeated.

Entries in the Books of the Hire-Vendor

Total Asset Method: In this method, debit the Hire-Purchaser and credit Hire-sales Account with the total cash price of the goods. As each instalment falls due, debit the hire-purchaser and credit interest account with the amount of interest on unpaid portion of the cash price. On receipt of cash, debit cash account and credit the hire-purchaser. The interest account will be closed by transfer to Profit & Loss Account. Hire Sales Account will also be closed by transfer to the Trading Account.
Interest Suspense Method: In this method, Hire-Purchaser’s Account is debited by total of all instalments (i.e. total cash price plus total interest) and Hire Sales Account and Interest Suspense Accounts are credited by total cash price and total interest respectively. Interest of each instalment is transferred from Interest Suspense Account to Interest Account.

The Journal Entries in the books Hire Vendor under different methods is shown below:

Events	Total Asset Method	Interest Suspense Method
On agreement	Hire-Purchaser A/c Dr. To Hire Sales A/c (Full cash price)	Hire-Purchaser A/c Dr. (Total instalments) To Hire-Sales A/c (Total cash price) To Interest Suspense A/c (Total Interest receivable)
On receipt of down payment	Cash/Bank A/c Dr. To Hire-Purchaser	Cash/Bank A/c Dr. To Hire-Purchaser
At the end of the 1^st year:
On instalment made due (including interest)	Hire-Purchaser A/c Dr. To Interest A/c	Interest Suspense A/c Dr. To Interest A/c
On receipt of Instalment	Cash/Bank A/c Dr. To Hire-Purchaser	Cash/Bank A/c Dr. To Hire-Purchaser
e. Transfer of the Sales A/c	Hire-Sales A/c Dr. To Trading A/c	Hire-Sales A/c Dr. To Trading A/c
Transfer of interest A/c	Interest A/c Dr. To Profit & Loss A/c	Interest A/c Dr. To Profit & Loss A/c

Note: In the subsequent years, entries (c.), (d.), (e.), (f.)will be repeated.

The assets and the Balance in Interest Suspense in the Balance Sheet of Purchaser and Vendor are as follows:

Hire Purchaser	Hire Vendor
Assets	Rs.	Assets	Rs.
Fixed Assets:		Current Assets:
	Asset on Hire Purchase			Hire Purchase Debtors
Add:	Balance in Interest Suspense A/c		Less:	Balance in Interest Suspense A/c
Less:	Depreciation

Transactions in case of small sale value of goods

The following methods are adopted:

Debtors Method,
Stock and Debtors Method.

Debtor’s Method

Where the goods of small value are sold on hire-purchase, the transactions are numerous and the agreement periods vary. In case, the purchasers are treated as individuals and they may record their purchases in their own way they like, but the entries in the books of the seller is described below:

Hire-Purchase Trading Account is prepared.
Separate Memorandum Accounts, Hire-Purchase Day Book and Customers Memorandum or Hire-Purchase Ledger are prepared. In Hire-Purchase Day Book, all hire-purchase sale, agreements are recorded.
This Memorandum Account contains particulars of Date, Folio, Cost Price of Goods Sold, Sale Price of Goods Sold, Number and Amount of Instalments etc.
The Hire-Purchase Ledger (Customer’s Memorandum Ledger) contains personal account of each customer. In this ledger, full hire-purchase price is debited and the instalments paid and hire-purchase price of any goods repossessed by the vendor is credited. These entries are passed on memorandum basis.
1. The double entry is completed by means of periodical totals to financial books in the following manner:
1. The total of the cost-price column of the Hire-Purchase Day Book is debited to Hire-Purchase Trading Account and is credited to Purchase Account. Alternatively, Hire-Purchase Trading Account is debited with the value of goods sold at hire-purchase price and credited to ‘Goods sold on H.P. A/c’. At the end of the year, entry is reversed with the amount of profit.
1. The total cash received on account of initial deposit (down payment) and the periodic instalments as well as any instalments due but not paid (Instalments Overdue) are credited to Hire-Purchase Trading Account. The Instalments overdue (due but not paid at the end of the year) are considered as book debt and are therefore treated as sales.
1. To ascertain gross profit or loss, the instalments received in cash including overdue instalments are treated as sales, but the instalments that are not due are regarded as ‘Stock out on Hire’. At the end of the year, this stock is valued at cost and is credited to Hire-Purchase Trading Account and carried down as a debit balance to the next period. Alternatively, Hire-Purchase Stock may be shown at hire-purchase price and Stock Reserve Account is shown with the amount of profit in the debit side of Hire-Purchase Trading Account.
1. Opening and closing stock with vendor, if any, (shop stock) will also be recorded in the Hire-Purchase Trading Account and then purchases to be debited in this account will be actual purchases. Alternatively, a separate Shop Stock Account is prepared at the balancing date, the cost of the stock out on hire is calculated as:

[(Amount of Installments not yet due x cost price of sold goods) /Total Hire-Purchase Price]

The difference on the Hire-Purchase Trading Account, thus, shows the gross profit or loss to be transferred to the Profit and Loss Account.

Accordingly, Hire-Purchase Trading Account and other relevant accounts are shown as follows:

Hire Purchase Trading A/c

To Balance b/d: – Hire Purchase Stock A/c (at H.P. Price) – Hire Purchase Debtors (at H.P. Price) To Goods sold on HP (at HP price) To Loss on Goods repossessed A/c To Expenses A/c To Bad Debts A/c To Stock Reserve A/c (loading on closing HP stock) To Profit & Loss A/c

By Cash/Bank A/c: Down PaymentInstalment collected for current year and previous year. By Goods repossessed A/c: (Instalment due but not paid on goods repossessed + cost of installment not due) By Balance C/d: – Hire Purchase Stock A/c (at HP price) (Instalment not due during the year) – Hire Purchase Debtor A/c (Instalment due but not collected) By Stock Reserve A/c (loading on opening HP stock) By Goods sold on HP (loading on goods sold on HP)

Memorandum Stock at Shop A/c

To Balance b/d (a cost) (Opening Stock) To Purchase

By Goods sold on HP (at cost) By Balance c/d (at cost) (Closing stock)

Goods sold on Hire Purchase A/c

To Shop Stock A/c (at cost) To Hire Purchase Trading A/c (loading amount)

By Hire Purchase Trading (at HP price)

Memorandum Hire Purchase Stock A/c

To Balance b/d (at HP price) (Opening HP Stock) To Goods sold on HP (at HP price)

By HP debtors A/c (Instalment due during the period) By Goods repossessed A/c (Instalment not yet due) By Balance c/d (Closing HP Stock)

Memorandum Hire-Purchase Debtors A/c

To Balance b/d (Opening debtors) To HP Stock A/c (Total Instalment due)

By Bank By Goods repossessed A/c (Instalment due but not yet received) By Balance c/d (Closing Debtors) (Instalment due but not collected during the period)

Stock and Debtors Method

In this method, ‘Instalments Due’ (Hire-Purchase Debtors) and ‘Instalments not Due’ (Hire-Purchase Stock) are prepared separately. Profit is ascertained by preparing Hire-Purchase Adjustment Account.
Under this system, following accounts are prepared:
Hire-Purchase Stock Account.
Hire-Purchase Debtors Account.
Hire-Purchase Adjustment Account.
Goods sold on Hire-Purchase Account.
Hire-Purchase Stock Reserve Account.
Shop Stock Account.

The Accounting Entries under this method are shown below:

	Transaction	Journal Entry
(1)	For goods sold on Hire-Purchase a. at H.P. Price & b. at cost price	a. H.P. Stock A/c. (at H.P price) To Goods sold on H.P. b. Goods sold on Hire Purchase A/c (at cost price) To Shop Stock A/c /Purchase A/c	Dr. Dr.
(2)	For Instalments becoming due.	H.P. Debtors To H.P. Stock A/c	Dr.
(3)	For cash received from customers.	Bank A/c To H.P. Debtors	Dr.
(4)	For loading (profit) included in opening H.P. stock.	Hire-Purchase Stock Reserve A/c To H.P. Adjustment A/c	Dr.
(5)	For loading (profit) included in goods sold on H.P.	Goods sold on H.P. A/c.(loading portion) To H.P. Adjustment A/c	Dr.
(6)	For loading (Profit) included in closing H.P. Stock	H.P. Adjustment A/c To H.P. Stock Reserve A/c	Dr.
(7)	Repossession of Goods:
	On default of customers.	Goods Repossessed A/c To H.P. Debtors (Instalment due) To H.P. Stock (Instalment not due)	Dr.
(8)	For difference between amount not received and value of repossessed goods (loss)	H.P. Adjustment A/c To Goods Repossessed A/c	Dr.
(9)	On sale of goods repossessed:	Bank A/c To Goods Repossessed A/c	Dr.
(10)	For profit on sale of goods repossessed. Note: In case of loss entry will be reversed.	Goods Repossessed A/c To H.P. Adjustment A/c	Dr.
(11)	Balance of H.P. Adjustment A/c. (profit)	H.P. Adjustment A/c To P/L A/c	Dr.

(12) Balance of Hire Purchase Adjustment A/c

Represent Gross Profit/Loss on Hire Purchase Business.
Transferred to Profit & Loss A/c.

(13) Balance of Shop Stock A/c represents Stock at Shop at Cost Price.

(14) Balance of HP Stock A/c represents Stock with Customer at HP Price.

(15) Balance of HP Debtors represents instalment due i.e. not received during the period.

Repossession of Goods on Default in Payment

When the hire-purchaser becomes defaulter in case of paying instalment, the vendor has right to repossess the goods or asset. Sometimes vendor takes back a part of the asset and enters into another agreement with the hire-purchaser. Repossession may be of two types as follows:

Complete/Total Repossession,
Partial Repossession.

Complete / Total Repossession

When vendor takes back total asset, following entries for interest due and depreciation are passed in the books of:

Hire-purchaser and
Hire- vendor.

In the books of Hire-Purchaser

Under Asset Accrual Method: All entries up to regular payment of instalments are passed in the books of the hire-purchaser in usual manner. Depreciation is charged upto date of default. Thereafter, the balance in the asset account is transferred to Profit and Loss Account.
1. Under Total Asset Method: All the entries are passed in the books of the hire-purchaser in usual manner. Entry for return of asset will be passed with the amount of balance in vendor’s account (total amount outstanding and payable to the vendor) on the date of default.

Books of Hire Purchaser (Total Repossession)

Journal Entries under different method

	Asset Accrual Method			Total Asset Method
1.	Profit & Loss A/c (Balance in the Asset a/c) To Asset Account (Being loss on the asset).	Dr.	1.	Hire Vendor A/c (Balance in Vendor’s A/c) To Asset Account (Being asset returned and balance transferred)	Dr.
			2.	Profit and Loss Account To Asset Account (Being loss on asset transferred) Note: If the asset account shows a credit balance, the entry will be vice-versa.	Dr.

In the books of Hire-Vendor

In the books of the vendor, Hire-purchaser account will be credited debiting Goods Repossessed Account by the amount of balance in the Hire-Purchaser’s Account.

Books of Hire Vendor

Journal Entries

Date	Particulars		Rs.	Rs.
1.	If the goods repossessed are valued at market price- Goods Repossessed (Stock) A/c ( market price ) Loss on Repossession of Stock A/c ( Loss ) To Hire-Purchaser Account (Balance outstanding) Note: a) The loss will be debited to Loss on Repossession of Goods account or Profit & Loss Account. b) If the market value of the asset returned is more than the amount due from hire purchaser, the excess will be credited to “Profit on Repossession of Stock A/c or Profit & Loss A/c”.	Dr. Dr.
2.	If the Vendor incurs any expenses on repossessed goods on repairing- Goods Repossessed A/c To Bank/Cash A/c	Dr.
3.	If the repossessed goods are sold out Bank/Cash A/c To Goods Repossessed A/c Note: Balance of Goods Repossessed A/c after sale is transferred to Profit & Loss A/c	Dr.

Partial Repossession : Entries are to be made in the books of:

Hire-purchaser and
Hire- vendor.

In the books of the Hire-Purchaser

Under Asset Accrual Method: Usual entries will be passed upto regular payment of instalments, charging depreciation, interest due upto the date of default.
1. Under Total Asset Value Method: Usual entries will be passed upto regular payment of instalments. Entries for charging depreciation and marking interest due upto the date of default will be passed. Entry for return of part asset be passed for the amount at which vendor was take back that part of asset.

Books of Hire Purchaser

Journal Entries under different method

	Asset Accrual Method			Total Asset Value Method
1.	The total amount due to the vendor on that date. Asset A/c [The amount still payable – Value of the part to vendor of the assets taken over] To Hire Vendor A/c (Being the amount due to vendor after partial repossession)	Dr.	1.	When the asset is taken by the vendor at the agreed value. Hire Vendor A/c (agreed value) To Asset A/c (Book value) (Being the asset is taken over at agreed value.)	Dr.
2.	In the Asset Account, the depreciated value of the part of asset left with the hire-purchaser will be carried forward. Keeping this balance, the balancing figure in the Asset Account (loss or profit) will be transferred to the Profit and Loss Account. In case of Loss: Profit and Loss A/c To Asset A/c (Loss on asset)	Dr.	2.	Now the balance in the Vendor Account will show amount payable to the hire-vendor after repossession of part of the asset. In the Asset Account, the carried forward balance will be the depreciated value of the part of asset left with the hire-purchaser. The difference between the agreed value and book value (profit or loss) will be transferred to the Profit and Loss Account. In case of Loss: Profit & Loss Account To Asset Account (Being loss on repossession of goods)	Dr.

In the Books of Hire Vendor

Journal Entries

Date	Particulars		Rs.	Rs.
1.	On repossession of goods: Goods Repossessed A/c To Hire Purchaser A/c	Dr.
2.	If the vendor incurs any expenses on repairing or overhauling on repossessed goods: Goods Repossessed A/c To Bank/Cash A/c Note: The Hire Vendor may sell such goods at profit or loss. In this case the journal entry will be similar to case of Total Repossession.	Dr.

Special Accounting treatment related to Hire-Purchase

When Hire Purchaser pays insurance premium together with instalment,
When the Hire- Purchaser buys through financial institution and sales,
When hire-purchaser transfers asset to other party during hire-purchase period.

When Hire Purchaser pays insurance premium together with instalment

Vendor may persuade hire-purchaser to pay insurance premium on assets together with the payment of instalment. As the right of ownership is held by the vendor, the payment of premium will be made to the insurance company by the vendor, but he can realize the premium amount from the hire-purchaser under agreement. The hire-purchaser will provide the amount of premium with the amount of instalment. He will pass the following journal entry.

Under Asset Accrual-Method Asset A/c ..Dr. Interest A/c ..Dr. Insurance Premium A/c ..Dr. To Hire Vendor (Amount of cash price portion, interest and insurance premium included in the instalment.)

Under Total Asset Method Interest A/c ..Dr. Insurance Premium A/c ..Dr. To Hire Vendor (Amount of interest and insurance premium included in the instalment.)

Note: Other entries will remain same and at the end of year Insurance Premium Account will also be transferred to Profit & Loss A/c.

When the Hire- Purchaser buys through financial institution and sales asset

When hire-purchase price is provided by a financial institution, through finance to the original vendor and instalments are to be paid by hire-purchaser to the institution, then in the books of hire-purchaser, the financial institution will be treated as vendor.

When the asset sold by the hire-purchaser and amount due to financial institution is paid, the Asset Account will be credited by the sale proceeds and amount paid to financial institution will be debited to Asset A/c under Asset Accrual Method. If accounts are kept under Total Asset Method, the Financial institution’s Account will be debited instead of Asset Account.

Ex. On 1^st January 2005, X Ltd. acquired a machine of which the cash price was Rs.7,540. The purchase of machine was financed by XYZ finance Corporation Ltd., to whom Rs.3,000 was payable by X Ltd., on 1^st January 2005 and instalments (including interest) of Rs.1,800 on 31^st December, 2005, 2006 and 2007 respectively. The rate of interest was 10% p.a.

On 1^st January 2007, the machine was sold for Rs.6,000 and the debt of the XYZ Finance Corporation Ltd. was discharged on the same date.

Show the accounts of XYZ Finance Corporation Ltd. and the Machine Account in the books of X Ltd., writing off depreciation at 10% on diminishing balance.

Solution: Steps involved in solving the above problem-

Calculation of Interest.
Preparation of Machinery A/c.
Preparation of XYZ Finance Corporation Ltd. A/c.

Calculation of Interest

Particulars		Cash Price	Instalment
	Rs.	Rs.	Rs.	Rs.
Cash Price		7,540
Less: Down Payment		3,000	3,000
		4,540
1^st Instalment	1,800
Less: Interest @ 10% of Rs.4,500	454	1,346	1,346	454
	1,346	3,194
2^nd Instalment	1,800
Less: Interest @ 10% of Rs.3,194	319	1,481	1,481	319
	1,481	1,713
3^rd Instalment	1,800
Less: Amount unpaid	1,713	1,713	1,713	87
	87	–
Total			7,540	860

Total payment = (3,000 + (1,800 x 3) = 8,400 i.e. Cost + interest = 7,540 + 860 = Rs.8,400

Machinery Account

Dr.					Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
2005 Jan. 1 2006 Jan. 1 2007 Jan. 1	To XYZ Finance Corporation Ltd. To Balance b/d To Balance b/d	7,540	2005 Dec. 31 Dec. 31 2006 Dec. 31 Dec. 31 2007 Jan. 1	By Depreciation A/c (Rs. 7,540 x 10%) By Balance c/d By Depreciation A/c (Rs. 6,786 x 10%) By Balance c/d By Bank A/c (Sale proceed) By Profit & Loss A/c (Loss on sale) [6,107-6,000]	7,54 6,786
7,540	7,540
6,786	679 6,107
6,786	6,786
6,107	6,000 107
6,107	6,107

XYZ Finance Corporation Ltd.

Dr.					Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
2005 Jan. 1 Dec. 31 Dec. 31 2006 Dec. 31 Dec. 31 2007 Jan. 1	To Bank A/c (Down payment) To Bank A/c (1^st Instalment) To Balance c/d To Bank A/c (2^nd Instalment) To Balance c/d To Bank A/c (Balance amount paid)	3,000 1,800 3,194	2005 Jan. 31 Dec. 31 2006 Jan. 1 Dec. 31 2007 Jan. 1	By Machinery A/c By Interest A/c By Balance b/d By Interest A/c By Balance b/d	7,540 454
7,994	7,994
1,800 1,713	3,194 319
3,513	3,513
1,713	1,713
1,713	1,713

When hire-purchaser transfers asset to other party during hire-purchase period

The hire-purchaser, after paying certain instalments to vendor, may transfer the asset to another party with the concurrence of the vendor. The subsequent purchaser will be obliged to pay remaining instalments to the vendor along with certain agreed amount to be paid to the original purchaser. The entry in the books of subsequent purchaser or transferee will be as below (under total asset method):

Asset Account ………Dr.

To Transferor (Original hire-purchaser)

To Vendor’s Account (outstanding instalments payable to the vendor).

Ex. X agreed with Y to purchase a boat under hire-purchase system on 1^st January 2007. It was agreed to pay half-yearly instalments of Rs. 738.39 on 30^th June and 31^st December. The cash price was Rs. 5,000 @ of interest was 6% p.a. on half yearly rests.

On Jan. 1, 2008 after paying two instalments X transferred his right under agreement to Z on a consideration of Rs.1,500. Z paid this amount to X immediately and agreed to pay remaining instalments to Y on due dates.

Pass journal entries in the books of Z on Jan., 1 and June 30, 2008. Books are closed on 30^th June. Depreciation was to be allowed at 10% p.a.

Solution: Steps involved in solving the above problem-

Calculation of Interest.
Passing Journal Entries.

1. Calculation of Interest

	Rs.	Cash Price Rs.	Principal Rs.	Interest Rs.
1^st Instalment	738.39	5,000.00
Less: Interest for 6 months @ 6% on 5,000	150.00
	588.39	588.39	588.39	150.00
		4,411.61
2^nd Instalment	738.39
Less: Interest for 6 months @ 6% on Rs.4,411.61	132.35
	606.04	606.04	606.04	132.35
		3,805.57	1,194.43	282.35

Total amount = Rs.(1,194.43 + 282.35) = Rs.1476.78

2. Books of Z

Journal Entries

Date	Particulars		Dr. (Rs.)	Cr. (Rs.)
2008 Jan. 1	Boat Account To X’s (Transferor’s Account) To Y’s (Vendor’s Account) (Purchase of boat through X)	Dr.	5,305.57	1,500.00 3,805.57
Jan. 1	X’s Account To Cash Account (Amount paid to X)	Dr.	1,500.00	1,500.00
June 30	Interest Account To Y’s (Vendor’s) Account (Interest on 3,805.57 for 6 months @ 6% p.a.)	Dr.	114.17	114.17
June 30	Y’s Account To Cash A/c (Instalment paid to vendors)	Dr.	738.39	738.39
June 30	Depreciation Account To Boat Account (Depreciation on Rs. 5,305.57 @ 10% for 6 months)	Dr.	265.28	265.28
June 30	Profit and Loss Account To Interest Account To Depreciation Account (Transfer of Int. and Depreciation to P/L A/c)	Dr.	379.45	114.17 265.28

Entries in the books of Purchaser under Asset Accrual Method, Total Asset value Method & Interest Suspense Method

Ex. On 1^st January 2007 Toyota Pvt. Ltd. purchase a car from Ford Industries Ltd. on hire-purchase basis. The cash price being Rs.75,000, Rs.20,000 was paid on the signing of the contract and the balance in three annual instalments of Rs.20,000 each of 31^st December each year. Interest is charged at 5 percent per annum. Depreciation was written off at the rate of 5 percent per annum on the reducing instalment system.

Give journal entries and ledger accounts in the books of Toyota Pvt. Ltd. and Ford Industries. Whose accounting year ends on 31^st Dec. every year.

Solution: Steps involved in solving the above problem:

Calculation of Interest.
Calculation of Depreciation.
Passing journal entries in the books of purchaser under Asset Accrual Method.
Preparing necessary ledger accounts in the books of purchaser.
Passing journal entries in the books of purchaser under Total Asset Value Method.
Preparing necessary ledger accounts in the books of purchaser.
Passing journal entries in the books of vendor.
Passing journal entries in the books of purchaser under Interest Suspense Method.
Preparing necessary ledger accounts in the books of purchaser.
Passing journal entries in the books of vendor.

Working Details :

Calculation of Interest

Particulars		Cash Value	Instalment
Principal	Interest
	Rs.	Rs.	Rs.	Rs.
Cash Price		75,000
Less: Down Payment		20,000	20,000
		55,000
First Instalment	20,000
Less: Int. @ 5% on Rs.55,000	2,750
Principal	17,250	17,250	17,250	2,750
Second Instalment	20,000	37,750
Less: Inst. 5% on Rs.37,750	1,888
Principal	18,112	18,112	18,112	1,888
		19,638
Final Instalment	20,000
Less: Amount unpaid	19,638	19,638	19,638
Interest	362			362
Total		Nil	75,000	5,000

2. Calculation of Depreciation:

First Year- Cash Value 5% Depreciation on	Rs. 75,000 Rs. 3,750
Second Year- Written down value Rs.75,000- 3,750 5% Depreciation on Rs. 71,250	= Rs. 71,250 = Rs. 3,563
Third Year- Written down value Rs.71,250- Rs.3,563 5% Depreciation on Rs. 67,687	= Rs. 67,687 = Rs. 3,384

3. First Method: Asset Accrual Method

Books of Toyota Pvt. Ltd. (Purchaser)

Journal Entries

Date	Particulars		Dr. Rs.	Cr. Rs.
2007 Jan. 1	Car Account To Ford Industries Ltd. (Vendors) (Down payment capitalized for assets purchased under hire-purchase)	Dr.	20,000	20,000
Jan. 1	Ford Industries (Vendors) To Bank Account (Payment made)	Dr.	20,000	20,000
Dec. 31	Car Account Interest Account To Ford Industries Ltd. (Vendors) (First instalment due)	Dr. Dr.	17,250 2,750	20,000
Dec. 31	Ford Industries Ltd. To Bank Account (Payment of I^st Instalment to Vendors)	Dr.	20,000	20,000
Dec. 31	Depreciation Account To Car Account (Depreciation charged @ 5% p.a.)	Dr.	3,750	3,750
Dec. 31	Profit and Loss Account To Interest Account To Depreciation Account (Transfer of Dep. and Int. to P/L A/c)	Dr.	6,500	2,750 3,750
2008 Dec. 31	Car Account Interest Account To Ford Industries Ltd. (Vendors) (Second Instalment due)	Dr. Dr.	18,112 1,888	20,000
Dec. 31	Ford Industries Ltd. (Vendors) To Bank Account (Payment of II^nd instalment to Vendors)	Dr.	20,000	20,000
Dec. 31	Depreciation Account To Car Account (Depreciation charged @ 5% p.a.)	Dr.	3,563	3,563
Dec. 31	Profit and Loss Account To Interest Account To Depreciation Account (Transfer of Dep. and Int. to P/L A/c)	Dr.	5,451	1,888 3,563
2009 Dec. 31	Car Account Interest Account To Ford Industries Ltd. (Third instalment due)	Dr. Dr.	19,638 362	20,000
Dec. 31	Ford Industries Ltd. To Bank Account (Payment of third instalment to Vendors)	Dr.	20,000	20,000
Dec. 31	Depreciation Account To Car Account (Depreciation charged @ 5% p.a.)	Dr.	3,384	3,384
Dec. 31	Profit and Loss Account To Interest Account To Depreciation Account (Transfer of Dep. and Int. to P/L A/c)	Dr.	3,746	362 3,384

4. Ledger (In the books of Purchaser)

Car Account

Dr.					Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
2007 Jan. 1 Dec. 31	To Ford Industries Ltd. To Ford Industries Ltd.	20,000 17,250	2007 Dec. 31 Dec. 31	By Depreciation A/c By Balance c/d	3,750 33,500
		37,250			37,250
2008 Jan. 1 Dec. 31	To Balance b/d To Ford Industries	33,500 18,112	2008 Dec. 31 Dec. 31	By Depreciation A/c By Balance c/d	3,563 48,049
		51,612			51,612
2009 Jan. 31 Dec. 31	To Balance b/d To Ford Industries Ltd.	48,049 19,638	2009 Dec. 31 Dec. 31	By Depreciation A/c By Balance c/d	3,384 64,303
		67,687			67,687

Ford Industries Ltd. (Vendors)

Dr.					Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
2007 Jan. 1 Dec. 31	To Bank A/c To Bank A/c	20,000 20,000	2007 Jan. 1 Dec. 31	By Car A/c By Car A/c By Interest A/c	20,000 17,250 2,750
		40,000			40,000
2008 Dec. 31	To Bank A/c	20,000	2008 Dec. 31	By Car A/c By Interest A/c	18,112 1,888
		20,000			20,000
2009 Dec. 31	To Bank A/c	20,000	2009 Dec. 31	By Car A/c By Interest A/c	19,638 362
		20,000			20,000

Interest Account

Dr.					Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
2007 Dec. 31	To Ford Industries Ltd.	2,750	2007 Dec. 31	By P & L A/c	2,750
		2,750			2,750
2008 Dec. 31	To Ford Industries Ltd.	1,888	2008 Dec. 31	By P & L A/c	1,888
		1,888			1,888
2009 Dec. 31	To Ford Industries Ltd.	362	2009 Dec. 31	By P & L A/c	362
		362			362

Depreciation Account

Dr.					Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
2007 Dec. 31	To Car A /c	3,750	2007 Dec. 31	By P & L A/c	3,750
		3,750			3,750
2008 Dec. 31	To Car A/c	3,563	2008 Dec. 31	By P & L A/c	3,563
		3,563			3,563
2009 Dec. 31	To Car A/c	3,384	2009 Dec. 31	By P & L A/c	3,384
		3,384			3,384

5. Second Method: Total Asset value Method

Books of Toyota Pvt. Ltd. (Purchaser)

Journal Entries

Date	Particulars		Dr. Rs.	Cr. Rs.
2007 Jan. 1	Car Account To Ford Industries Ltd. (Machine purchases on hire-purchase)	Dr.	75,000	75,000
Jan. 1	Ford Industries Ltd. To Bank Account (Down payment made)	Dr.	20,000	20,000
Dec. 31	Interest Account To Ford Industries Ltd. (Interest due)	Dr.	2,750	2,750
Dec. 31	Ford Industries Ltd. To Bank Account (First instalment paid)	Dr.	20,000	20,000
Dec. 31	Depreciation Account To Car Account (Depreciation charged @ 5% p.a.)	Dr.	3,750	3,750
Dec. 31	Profit and Loss Account To Interest Account To Depreciation Account (Transfer of Dep. and Int. to P/L A/c)	Dr.	6,500	2,750 3,750
2008 Dec. 31	Interest Account To Ford Industries Ltd. (Interest due)	Dr.	1,888	1,888
Dec. 31	Ford Industries Ltd. To Bank Account (Being second instalment paid)	Dr.	20,000	20,000
Dec. 31	Depreciation Account To Car Account (Depreciation charged 5% p.a.)	Dr.	3,563	3,563
Dec. 31	Profit and Loss Account To Interest Account To Depreciation Account (Transfer of Dep. and Int. to P/L A/c)	Dr.	5,451	1,888 3,563
2009 Dec. 31	Interest Account To Ford Industries Ltd. (Interest due)	Dr.	362	362
Dec. 31	Ford Industries Ltd. To Bank Account (Third instalment paid)	Dr.	20,000	20,000
Dec. 31	Depreciation Account To Car Account (Depreciation charged @ 5% p.a.)	Dr.	3,384	3,384
Dec. 31	Profit and Loss Account To Interest Account To Depreciation Account (Transfer of Dep. and Int. to P/L A/c)	Dr.	3,746	362 3,384

6. Ledger

Car Account

Dr.					Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
2007 Jan. 1	To Ford Industries Ltd.	75,000	2007 Dec. 31	By Depreciation A/c By Balance c/d	3,750 71,250
		75,000			75,000
2008 Jan. 1	To Balance b/d	71,250	2008 Dec. 31	By Depreciation A/c By Balance c/d	3,563 67,687
		71,250			71,250
2009 Jan. 1	To Balance b/d	67,687	2009 Dec. 31	By Depreciation A/c By Balance c/d	3,384 64,303
		67,687			67,687

Ford Industries Account

Dr.					Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
2007			2007
Jan. 1	To Bank A/c	20,000	Jan. 1	By Car A/c	75,000
Dec. 31	To Bank A/c	20,000	Dec. 31	By Interest A/c	2,750
Dec. 31	To Balance c/d	37,750
		77,750			77,750
2008			2008
Dec. 31	To Bank A/c	20,000	Jan. 1	By Balance b/d	37,750
Dec. 31	To Balance c/d	19,638	Dec. 31	By Interest A/c	1,888
		39,638			39,638
2009 Dec. 31	To Bank A/c	20,000	2009 Dec. 31	By Balance b/d	19,638
			Dec. 31	By Interest A/c	362
		20,000			20,000

Note: Depreciation Account and Interest Account will be prepared according to first method.

7. Journal Entries in the books of Ford Industries Ltd. (Vendors)

Date	Particulars		Dr.	Cr.
			Rs.	Rs.
2007 Jan. 1	Toyota Pvt. Ltd. A/c (Hire-Purchasers) To Hire-Sales Account (Sale on hire-purchase system)	Dr.	75,000	75,000
	Bank Account To Toyota Pvt. Ltd. (Down payment received)	Dr.	20,000	20,000
Dec. 31	Toyota Pvt. Ltd. To Interest Account (Interest charged)	Dr.	2,750	2,750
	Bank Account To Toyota Pvt. Ltd. (First instalment received)	Dr.	20,000	20,000
	Interest Account To Profit and Loss Account (Transfer of Interest to P/L A/c)	Dr.	2,750	2,750
	Hire Sales A/c To Trading Account (Transfer of Hire-sales to Trading Account)	Dr.	75,000	75,000
2008 Dec. 31	Toyota Pvt. Ltd. To Interest Account (Interest charged)	Dr.	1,888	1,888
	Bank Account To Toyota Pvt. Ltd. (Second instalment received)	Dr.	20,000	20,000
	Interest Account To Profit and Loss Account (Transfer of Interest to P/L A/c)	Dr.	1,888	1,888
2009 Dec. 31	Toyota Pvt. Ltd. To Interest Account (Interest charged)	Dr.	362	362
	Bank Account To Toyota Pvt. Ltd. (Third instalment received)	Dr.	20,000	20,000
	Interest Account To Profit and Loss Account (Transfer of Interest to P/L A/c)	Dr.	362	362

8. Third Method: Interest Suspense Method

Books of Toyota Pvt. Ltd.

Journal Entries

Date	Particulars		Dr. Rs.	Cr. Rs.
2007 Jan. 1	Car A/c Interest Suspense A/c To Ford Industries Ltd. (Vendors) (Car purchased on hire-purchase)	Dr. Dr.	75,000 5,000	80,000
Jan. 1	Ford Industries Ltd. (Vendors) To Bank A/c (Down payment made)	Dr.	20,000	20,000
Dec.31	Interest Account To Interest Suspense Account (Interest due)	Dr.	2,750	2,750
Dec.31	Ford Industries Ltd. To Bank Account (First instalment paid)	Dr.	20,000	20,000
Dec.31	Depreciation Account To Car Account (Depreciation charged @ 5% p.a.)	Dr.	3,750	3,750
Dec.31	Profit and Loss Account To Interest Account To Depreciation Account (Transfer of Dep. And Interest to P/L A/c)	Dr.	6,500	2,750 3,750
2008 Dec.31	Interest Account To Interest Suspense Account (Interest due)	Dr.	1,888	1,888
Dec.31	Ford Industries Ltd. To Bank Account (Second instalment paid)	Dr.	20,000	20,000
Dec.31	Depreciation Account To Car Account (Depreciation charged @ 5% p.a.)	Dr.	3,563	3,563
Dec.31	Profit and Loss Account To Interest Account To Depreciation Account (Transfer of Depreciation and Interest to P/L A/c)	Dr.	5,451	1,888 3,563
2009 Dec.31	Interest Account To Interest Suspense Account (Interest due)	Dr.	362	362
Dec.31	Ford Industries Ltd. To Bank Account (Third instalment paid)	Dr.	20,000	20,000
Dec.31	Depreciation Account To Car Account (Depreciation charged @ 5% p.a.)	Dr.	3,384	3,384
Dec.31	Profit and Loss Account To Interest Account To Depreciation Account (Transfer of Dep. and Interest to P/L A/c)	Dr.	3,746	362 3,384

9. Ledger

Car Account

Dr.					Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
2007 Jan. 1	To Ford Industries Ltd.	75,000	2007 Dec. 31	By Depreciation A/c By Balance c/d	3,750 71,250
		75,000			75,000
2008 Jan. 1	To Balance b/d	71,250	2008 Dec. 31	By Depreciation A/c By Balance c/d	3,563 67,687
		71,250			71,250
2009 Jan. 1	To Balance b/d	67,687	2009 Dec. 31	By Depreciation A/c By Balance c/d	3,384 64,303
		67,687			67,687

Ford Industries A/c

Dr.					Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
2007 Jan. 1 Dec. 31 Dec. 31	To Bank A/c To Bank A/c To Balance c/d	20,000 20,000 40,000	2007 Jan. 1	By Car A/c By Int. suspense A/c	75,000 5,000
		80,000			80,000
2008 Dec. 31 Dec. 31	To Bank A/c To Balance c/d	20,000 20,000	2008 Jan. 1	By Balance b/d	40,000
		40,000			40,000
2009			2009
Dec. 31	To Bank A/c	20,000	Jan.1	By Balance b/d	20,000

Interest suspense A/c

Dr.					Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
2007 Jan. 1	To Ford Industries Ltd. A/c	5,000	2007 Dec. 31 Dec. 31	By Interest A/c By Balance c/d	2,750 2,250
		5,000			5,000
2008 Jan. 1	To Balance b/d	2,250	2008 Dec. 31 Dec. 31	By Interest A/c By Balance c/d	1,888 362
		2,250			2,250
2009 Jan. 1	To Balance b/d	362	2009 Dec. 31	By Interest A/c	362

10. Journal Entries in the books of Ford Industries Ltd. (Vendors)

Date	Particulars		Dr.	Cr.
			Rs.	Rs.
2007 Jan. 1	Toyota Pvt. Ltd. (Hire-Purchaser) To Hire-Sales Account To Interest suspense Account (Sale on hire-purchase system)	Dr.	80,000	75,000 5,000
Jan. 1	Bank A/c To Toyota Pvt. Ltd. (Down payment received)	Dr.	20,000	20,000
Dec. 31	Interest suspense A/c To Interest A/c (Interest charged)	Dr.	2,750	2,750
Dec. 31	Bank A/c To Toyota Pvt. Ltd. (First instalment received)	Dr.	20,000	20,000
Dec. 31	Interest A/c To Profit and Loss Account (Transfer of interest to P/L A/c)	Dr.	2,750	2,750
Dec. 31	Hire Sales A/c To Trading A/c (Transfer of Hire-sales to Trading Account)	Dr.	75,000	75,000
2008 Dec. 31	Interest suspense A/c To Interest A/c (Interest charged)	Dr.	1,888	1,888
Dec. 31	Bank A/c To Toyota Pvt. Ltd. (Second instalment received)	Dr.	20,000	20,000
Dec. 31	Interest A/c To Profit and Loss A/c (Transfer of interest to P & L A/c)	Dr.	1,888	1,888
2009 Dec. 31	Interest suspense A/c To Interest A/c (Interest charged)	Dr.	362	362
Dec. 31	Bank A/c To Toyota Pvt. Ltd. (Third instalment received)	Dr.	20,000	20,000
Dec. 31	Interest A/c To Profit and Loss A/c (Transfer of interest to P & L A/c)	Dr.	362	362

Preparation of Hire Purchase Trading A/c and Trading & P/L A/c

Ex. Welwash (Pvt.) Ltd. sells washing machines for outright cash as well as on hire-purchase basis. The cost of a washing machine to the company is Rs.10,500. The company has fixed cash price of the machine at Rs.12,300 and hire-purchase price at Rs.13,500 payable as to Rs.1,500 down and the balance in 24 equal monthly instalments of Rs.500 each.

On 1^st April, 2000 the company had 26 washing machines lying in its showroom. On that date 3 instalments had fallen due, but not yet received and 675 instalments were yet to fall due in respect of machines lying with the hire-purchase customers.

During the year ended 31^st March, 2001 the company sold 130 machines on cash basis and 80 machines on hire-purchase basis. After paying five monthly instalments, one customer failed to pay subsequent instalments and the company had to repossess the washing machine. After spending Rs.1,000 on it, the company resold it for Rs.11,500.

On 31^st March, 2001 there were 21 washing machines in stock, 810 instalments were yet to fall due and 5 instalments had fallen due, but not yet received in respect of washing machines lying with the hire- purchase customers. Total selling expenses and office expenses including depreciation on fixed assets totaled Rs.1,60,000 for the year.

You are required to prepare for the Accounting year ended 31^st March, 2001:

Hire-purchase Trading Account, and
Trading and Profit & Loss Account showing net profit earned by the company after making provision for Income-tax @ 35%.

Solution: Steps involved in solving the above problem :

Calculation of instalments collected.
Calculation of Purchases of Washing Machines.
Calculation of Stock Reserve and Loading.
Preparation of Hire-Purchase Trading A/c.
Preparation of Trading and Profit & Loss A/c.

Working Details:

Calculation of instalments collected

Particulars	Rs.	Rs.
Opening H.P. Stock Opening instalments due (3 x 500) Hire Purchase price of goods sold	3,37,500 1,500 10,80,000	14,19,000
Less: Repossessed goods Closing Hire Purchase Stock (Rs. 810 x 500) Closing Instalments Due (Rs. 500 x 5)	9,500 4,05,000 2,500	4,17,000
Amount of Instalment Collected		10,02,000

Calculation of Purchases of Washing Machines

Particulars	Nos.	Nos.	Rs.
Closing Balance	21
Add: Cash Sales	130
Sales on Hire Purchase basis	80	231
Less: Opening Stock		26
Purchase during the year		205
Purchase (205 x 10,500)			21,52,600

Calculation of Stock reserve and Loading

Particulars	Rs.
Hire-Purchase price of a Washing Machine Less; Cost of a Washing Machine	13,500 10,500
Profit on H.P. sale of a Washing Machine	3,000

Therefore, Stock Reserve on Opening Hire-Purchase stock = Rs.(3,37,500 x 3,000/13,500)

= Rs. 75,000.

Stock Reserve on Closing Hire-Purchase stock = Rs. (4,05,000 x 3,000/13,500) = Rs.90,000.

Loading on goods sold on Hire-Purchase = Rs. (10,80,000 x 3,000/13,500) = Rs. 2,40,000.

4. Books of Welwash (Pvt.) Ltd.

Hire Purchase Trading Account for the year ended 31^st March, 2001

Dr.			Cr.
Particulars	Rs.	Particulars	Rs.
To Opening Hire Purchase Stock (Rs. 500 x 675) To Instalment Due To Goods sold on Hire PurchaseA/c (Rs. 13,500 x 80) To Hire Purchase Stock Reserve (Wn.3) To Profit and Loss Account: (Transfer of profit)	3,37,500 1,500 10,80,000 90,000 2,25,000	By Hire Purchase Stock Reserve (Wn.-3) By Bank (Instalment Collected) (Wn. 1) By Repossessed Goods Rs.[13,500-1,500 – 500 x 5)] By Goods sold on Hire Purchase A/c (Loading-Wn.-3) By Hire Purchase Stock (Rs.500 x 810) By Instalment Due (Rs. 500 x 5)	75,000 10,02,000 9,500 2,40,000 4,05,000 2,500
	17,34,000		17,34,000

5. Trading and Profit and Loss Account for the year ended 31.3.01

Dr.			Cr.
Particulars	Rs.	Particulars	Rs.
To Sundry Expenses To Net Profit (before charging Provision for Income Tax)	1,60,000 3,00,000	By Gross Profit b/d By Profit on Hire Purchase Trading By Repossessed Goods (Rs.11,500 – 1,000 – 9,500)	2,34,000 2,25,000 1,000
	4,60,000		4,60,000
To Provision for Income Tax (3,00,000 x 35%) To Net profit for the year	1,05,000 1,95,000	By Net Profit (before charging Provision for Income Tax)	3,00,000
	3,00,000		3,00,000

Memorandum Stock at Shop A/c, Memorandum Hire Purchase Stock A/c & Memorandum Hire Purchase Debtors A/c

Ex. ABC Ltd. sells goods on Hire Purchase by adding 50% above cost.

From the following particulars prepare Hire Purchase Trading Account to reveal the profit for the year ended on 31.3.2005:

		Rs.
1.4.2004	Instalments due but not collected	10,000
1.4.2004	Stock at shop (at cost)	36,000
1.4.2004	Instalment not yet due	18,000
31.3.2005	Stock at shop	40,000
31.3.2005	Instalments due but not collected	18,000
Other Details :
	Total instalments became due	1,32,000
	Goods purchased	1,20,000
	Cash received from customers	1,21,000

Goods on which due instalments could not be collected were repossessed and valued at 30% below original cost. The vendor spent Rs.500 getting goods overhauled and then sold for Rs. 2,800.

Solution: Steps involved here solving the problem-

Working detail of Memorandum Stock at Shop A/c.
Working detail of Memorandum Hire Purchase Stock (Instalment not yet due) A/c.
Working detail of Memorandum Hire Purchase Debtors (due instalment but not collected) A/c.
Working detail of Goods Repossessed A/c.
Calculation of Loading on Stock.
Calculation of Loss on Repossession.
Preparing Hire Purchase Trading A/c.

Working Details:

Memorandum Stock at Shop A/c

Dr.				Cr.
Particulars	Rs.	Particulars	Rs.
To Balance b/d To Hire Purchase A/c	36,000 1,20,000	By Goods sold on Hire Purchase (Bal.Fig.) By Balance C/d	1,16,000 40,000
1,56,000	1,56,000

Memorandum Hire purchase Stock (Instalment not yet due)

Dr.				Cr.
Particulars	Rs.	Particulars	Rs.
To Balance b/d To Goods sold on Hire Purchase A/c [1,16,000+50% on 1,16,000]	18,000 1,74,000	By Hire Purchase sales A/c By Balance c/d (Bal. Fig.)	1,32,000 60,000
1,92,000	1,92,000

Note: As the goods are sold out on 50% above cost.

Memorandum Hire Purchase Debtors (due instalment but not collected) A/c

Dr.				Cr.
Particulars	Rs.	Particulars	Rs.
To Balance b/d To Hire Purchase Sales A/c	10,000 1,32,000	By Cash A/c By Goods Repossessed (Bal. Fig.) By Balance c/d	1,21,000 3,000 18,000
	1,42,000		1,42,000

Goods Repossessed A/c

Dr.				Cr.
Particulars	Rs.	Particulars	Rs.
To Hire Purchase Debtors A/c	3,000	By Hire Purchase Trading A/c (WN 6) By Balance c/d (WN 6)	1,600 1,400
3,000	3,000
To Balance b/d To Cash A/c (expenses) To Profit on sale (Bal. Fig.)	1,400 500 900	By Cash A/c (sale)	2,800
2,800		2,800

5. Calculation of Loading on stock

Let cost=Rs.100, profit =Rs.50

Therefore, selling price is Rs.(100+50)= Rs.150

So, proportion of profit on selling price= 50/150= 1/3^rd

Loading on opening H.P Stock=1/3^rd of Rs.18,000=Rs.6,000

Loading on closing H.P Stock=1/3^rd of Rs.60,000 (Wn 2)=Rs.20,000

Loading on goods sold on H.P= 1/3^rd of Rs.1,74,000 (Wn 2)= Rs.58,000

6. Calculation of Loss on Repossession

Particulars	Rs.
Original cost of Goods Repossessed (Rs.3,000 x 100/150) instalment due but not collected – Valuation of Repossessed goods (70% of Rs.2,000) [as valued at 30% below cost] Loss on repossession [3,000 – 1,400]	2,000 3,000 1,400 1,600

7. Hire Purchase Trading Account for the year ended 31.3.2005

Dr.					Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
1.4.04 1.4.04- 31.3.05 31.3.05 31.3.05	To Hire Purchase Stock A/c To Goods sold on Hire Purchase A/c (Wn 2) To Loss on Goods repossession A/c (Wn 6) To Stock Reserve A/c (Wn 5) To Profit & Loss A/c (transfer)	18,000 1,74,000 1,600 20,000 43,300	1.4.04 1.4.04 – 31.3.05 31.3.05	By Stock Reserve A/c (Wn 5 ) By Hire Purchase Sales A/c By Goods sold on Hire Purchase A/c (Wn 5) By Profit on sale of goods repossessed A/c (Wn 4) By Hire Purchase Stock (Wn 2)	6,000 1,32,000 58,000 900 60,000
2,56,900	2,56,900

Stock and Debtors Method

Ex. Wye sells goods on Hire- purchase at cost plus 50%. Prepare Hire – purchase Trading A/c from the information given below:

	Rs.
Stock with customers on hire – purchase price (opening)	1,62,000
Stock in hand at shop (opening)	3,24,000
Installment overdue (opening)	1,35,000
Purchases during the year	10,80,000
Goods re – possessed ( instalments not due Rs.36,000)	9,000
Stock at shop excluding re – possessed goods (closing)	3,60,000
Cash received during the year	10,35,000
Installments overdue (closing)	1,62,000

The vendor spent Rs.2,000 on goods re – possessed and then sold it for Rs.15,000.

Solution: Steps involved here solving the problem-

Calculation of shop Stock.
Calculation of Hire Purchase Debtors.
Calculation of Hire Purchase Stock.
Calculation of Loading on Stock.
Preparation of Hire Purchase Trading Account.
Shop Stock Account

Dr.			Cr.
Particulars	Rs.	Particulars	Rs.
To bal b/d	3,24,000	By Goods sold on hire purchase (Bal. fig)	10,44,000
To Purchases	10,80,000	By bal c/d	3,60,000
	14,04,000		14,04,000

H.P Debtors Account

Dr.			Cr.
Particulars	Rs.	Particulars	Rs.
To bal b/d (Op. balance)	1,35,000	By Cash received	10,35,000
To Hire sales (instalment due)	10,62,000	By bal c/d (bal. fig)	1,62,000
	11,97,000		11,97,000

H.P Stock Account

Dr.			Cr.
Particulars	Rs.	Particulars	Rs.
To bal b/d	1,62,000	By H.P. debtors (instalment due)	10,62,000
To Goods sold on hire purchase (10,44,000 x 150%)	15,66,000	By Goods re – possessed By bal c/d (bal. fig)	36,000 6,30,000
	17,28,000		17,28,000

Calculation of Loading on stock

Closing H.P Stock Reserve	=	6,30,000 x (50/150)	=	Rs.2,10,000
Opening H.P Stock Reserve	=	1,62,000 x (50/150)	=	Rs.54,000
Loading on goods sold on HP	=	15,66,000 x (50/150)	=	Rs.5,22,000

It has been assumed that cash received during the year of Rs.10,35,000 did not include sale proceeds of re-possessed goods Rs.15,000.

In the books of WYE

Hire Purchase Trading Account

Dr.	Cr.
Particulars	Rs.	Particulars	Rs.
To Hire Purchases stock	1,62,000	By H.P Stock Reserve (W.N-4)	54,000
To Installment overdue (H.P debtors)	1,35,000	By cash received (10,35,000+ 15,000)	10,50,000
To Goods sold on hire purchase (W.N.-3)	15,66,000	By Goods sold on hire purchase (W.N-4)	5,22,000
To Cash (Exp. On repossessed goods)	2,000	By Goods repossessd A/c	9,000
To H.P Stock Reserve (W.N-4)	2,10,000	By Hire purchase stock (W.N-3)	6,30,0000
To Profit & loss A/c(transferred) (Bal. fig)	3,52,000	By Installment overdue (H.P debtors)	1,62,000
	24,27,000		24,27,000

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Hire-Purchase Accounts

Memorandum Hire-Purchase Debtors A/c

Special Accounting treatment related to Hire-Purchase

1. Calculation of Interest

2. Books of Z

Journal Entries

Preparation of Hire Purchase Trading A/c and Trading & P/L A/c

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