Installment Payment Accounts -

Last Updated on: 5th July 2024, 01:43 pm

Installment Payment Accounts

Installment Payment System

In Instalment Payment System, the property in the goods passes from vendor to the purchaser immediately on sale and the purchase price is paid by buyer in instalments over a period of time. The interest is paid on outstanding balance of cash price like hire-purchase.

Under an instalment payment system, if default is made in payment, the vendor does not have the right to take back the possession of the goods. He can only bring a legal action against the purchaser for the balance of the debt.

Distinction between Hire-Purchase and Instalment Payment Systems

Basis of Difference	Hire-Purchase System	Instalment Payment System
Nature of Transaction	Initially the transaction is of hire which is converted into sale after the instalment payment.	It is a transaction of sale.
Related Parties	The parties of the hire-purchase are called hire-purchaser and hire vendor.	The parties of Instalment Payment System are called buyer and seller.
Ownership transferring	The right of ownership in goods is transferred to the purchaser after payment of the last instalment.	The right of ownership is transferred to the buyer immediately at the time of agreement.
Right of the vendor	The vendor has right to take back the goods on default in the payment of instalment.	The vendor has no right to take back the goods but to sue purchaser for the balance of the debt.
Right of the Purchaser	The purchaser has right to terminate the agreement, right to return the goods and no liability to pay the remaining instalments. He cannot sell the goods to a third party.	The purchaser has no right to terminate the agreement, and cannot escape the liability of the payment of the remaining instalments. He can sell the goods to a third party.
Right of the third party	The third party cannot get better title on goods transferred to him by the buyer.	The third party gets good title on the goods transferred to him by the buyer.
Liability of Party	During the hire-purchase period, the liability of maintenance and repairing of goods sold under hire-purchase is borne by the vendor.	The vendor has no liability for maintenance and repair of the goods.
Relationship between parties	The relation between hire-purchaser and hire vendor is of a bailee and a bailor.	It is a contract of sale. No bailment is involved.

The calculation of interest will be same as in case of Hire-Purchase System. In both cases, the interest is paid on outstanding cash price balance.

Accounting Entries in Instalment Payment System

Under Instalment Payment System, entries are similar to Interest Suspense Method under the Hire-Purchase System. In respect of purchase and sale of the goods the entries to be made-

In the Books of purchaser and
In the books of vendor.

In the Books of Purchaser

On purchase, following entry is to be made in the books of Purchaser-

Asset A/c	Dr.	(Cash value)
Interest Suspense A/c	Dr.	(Difference between the total amount payable and the price)
To Vendor A/c		(Total amount payable)

As interest is paid through a number of years, the Interest Suspense A/c is opened. The Vendor A/c is debited whenever payment is made.

At the end of financial year, the year’s interest is transferred to Interest A/c crediting to the Interest Suspense A/c.

Interest A/c	Dr.	(Interest on instalment)
To Interest Suspense A/c

In the Books of Vendor

On sale, the following entry is to be made in the books of Vendor-

Purchaser A/c	Dr.	(Full amount payable)
To Sales A/c		(Cash price)
To Interest Suspense A/c		(Excess of the total amount payable over the cash value of sales)

When payment is received-

Bank A/c	Dr.
To Purchaser A/c

At the end of financial year, the year’s interest is transferred from Interest Suspense A/c to Interest A/c.

Interest Suspense A/c	Dr.	(Interest on instalment)
To Interest A/c

Following are the differences in the accounting entries of Instalment Payment from Hire Purchase System-

As the goods purchased under Instalment Payment System become the property of the purchaser, these are shown in his Balance Sheet at cost less depreciation and the amount payable to the vendor will appear as a liability (and not as a deduction from the asset).
As the goods cannot be repossessed by the vendor in case of the buyer’s default, no provision for any possible loss on the goods, need to be made in the vendor’s book.

Interest Accounting – Practical Examples

Computation of Interest, Depreciation, Passing Journal Entries & Preparing Ledger A/cs
Ex. On 1^st January 2005, S Ltd. acquired a machine on Instalment System from T Ltd. of which the cash price was Rs.6,450. Payment is to be made as to Rs.1,000 down on 1^st January 2005 and instalments (including interest) of Rs.2,000 on 31^st December 2005, 2006 and 2007 respectively. Interest to be charged @ 5% p.a. Depreciation is to be charged @ 10% p.a. on the diminishing balance.

Give Journal Entries and Ledger Account in the books of both parties.

Solution:

Steps involved in solving the above problem-