Accounting for Hire Purchase and Accounting for Installment Purchase Transaction

1. ACCOUNTING FOR HIRE
PURCHASE AND ACCOUNTING
FOR INSTALLMENT PURCHASE
TRANSACTION
Complied By:-
Dhrumil Shah
FY BBA
Div 1
Roll No. 47

2. HIRE PURCHASE
 Hire Purchase system means a system under
which assets are let on hire and a hirer has an
option to purchase them in accordance with the
terms of the agreement.
 In simple words, hire purchase can be defined as
the system under which one pays regular
installments while using the asset.
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3. JOURNAL ENTRIES FOR HIRE PURCHASE TRANSACTION
 For the Purchase/Sale of the Asset/goods
Example:
Gopinath & Co. acquired a machinery on hire purchase from French Ltd.
of Rs. 1,00,000.
For Hire Purchaser
(Being purchase of asset from French Ltd.)
For Hire Vendor
(Being Sale of machinery to Gopinath & Co.)
In the Books of Hire Purchaser In the Books of Hire Vendor
Asset a/c Dr.
To Hire Vendor’s a/c
Hire Purchaser’s a/c Dr.
To Hire Purchase Sales
3
Particulars L.F. Debit Credit
Machinery a/c Dr.
To French Ltd.
1,00,000
1,00,000
Particulars L.F. Debit Credit
Gopinath & Co. Dr.
To Gopinath & Co.
1,00,000
1,00,000

4. JOURNAL ENTRIES FOR HIRE PURCHASE TRANSACTION
 For making/receiving Cash Down Payment
Example:
Gopinath & Co. made a down payment of Rs. 40,000 to French Ltd.
For Hire Purchaser
(Being down payment made for machinery)
For Hire Vendor
(Being down payment received from Gopinath & Co.)
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In the Books of Hire Purchaser In the Books of Hire Vendor
Hire Vendor’s a/c Dr.
To Cash/Bank a/c
Cash/Bank a/c Dr.
To Hire Purchaser’s a/c
Particulars L.F. Debit Credit
French Ltd. a/c Dr.
To Bank a/c
40,000
40,000
Particulars L.F. Debit Credit
Bank a/c Dr.
To Gopinath & Co.
40,000
40,000

5. JOURNAL ENTRIES FOR HIRE PURCHASE TRANSACTION
 For Interest Due
Example:
Interest chargeable is 10% p.a.
For Hire Purchaser
(Being interest due at 6%)
For Hire Vendor
(Being interest due at 6%)
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In the Books of Hire Purchaser In the Books of Hire Vendor
Interest a/c Dr.
To Hire Vendor’s a/c
Cash/Bank a/c Dr.
To Hire Purchaser’s a/c
Particulars L.F. Debit Credit
Interest a/c Dr.
To French Ltd.
3600
3600
Particulars L.F. Debit Credit
Bank a/c Dr.
To Gopinath & Co.
3600
3600

6. JOURNAL ENTRIES FOR HIRE PURCHASE TRANSACTION
 For Payment/Receipt of Hire Purchase Installment
Example:
Annual installment of Rs. 20,000 are to be paid.
For Hire Purchaser
(Being payment of installment and interest)
For Hire Vendor
(Being payment of installment and interest received)
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In the Books of Hire Purchaser In the Books of Hire Vendor
Hire Vendor’s a/c Dr.
To Cash/Bank a/c
Hire Purchaser’s a/c Dr.
To Interest a/c
Particulars L.F. Debit Credit
French Ltd. Dr.
To Bank a/c
23,600
23,600
Particulars L.F. Debit Credit
Gopinath & Co. Dr.
To Interest
23,600
23,600

7. JOURNAL ENTRIES FOR HIRE PURCHASE TRANSACTION
 For charging depreciation(At the end of year)
Example:
Depreciation is charged at 10% p.a.
For Hire Purchaser
(Being depreciation charged at 10%)
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In the Books of Hire Purchaser In the Books of Hire Vendor
Depreciation a/c Dr.
To Asset a/c
No Entry
Particulars L.F. Debit Credit
Depreciation a/c Dr.
To Machinery a/c
10,000
10,000

8. JOURNAL ENTRIES FOR HIRE PURCHASE TRANSACTION
 For closure of Depreciation a/c and Interest a/c
Example:
For Hire Purchaser
(Being Depreciation and Interest charged to Profit and Loss a/c)
For Hire Vendor
(Being interest amount transferred to profit and loss a/c)
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In the Books of Hire Purchaser In the Books of Hire Vendor
Profit & Loss a/c Dr.
To Depreciation a/c
To Interest a/c
Interest a/c Dr.
To Profit & Loss a/c
Particulars L.F. Debit Credit
Profit & Loss a/c Dr.
To Depreciation a/c
To Interest a/c
13,600
10,000
3600
Particulars L.F. Debit Credit
Interest a/c Dr.
To Profit & Loss a/c
3,600
3600

9. INSTALLMENT SYSTEM
 Installment purchase agreement means an
agreement of sale or in other words, it is a system
where the buyer is given the ownership as well as
the possession of the goods at the time of signing
the contract. The buyer has the facility to pay the
price in installments.
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10.  For Purchase/Sale of Asset
Example:
A purchased a machine under Installment Purchase System from B
on 1st January 2006 for a sum of Rs. 1,60,000. Rs. 40,000 is to paid
on signing the contract and the cash price of the machine was Rs.
1,49,000.
For Purchaser
For Seller
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JOURNAL ENTRIES FOR INSTALLMENT PURCHASE
TRANSACTION
In the Books of Purchaser In the Books of Seller
Asset a/c Dr.
Interest Suspense a/c Dr.
To Seller’s a/c
Purchaser’s a/c Dr.
To Interest Suspense a/c
To Sales a/c
Particulars L.F. Debit Credit
Machinery a/c Dr.
Interest Suspense a/c Dr.
To B’s a/c a/c
1,49,000
11,000
1,60,000
Particulars L.F. Debit Credit
A’s a/c Dr.
To Interest Suspense a/c
To Sales a/c
1,60,000
11,000
1,49,000

11.  For Cash Down payment
Example:
A made a down payment of Rs. 40,000 to B.
For Purchaser
(Being down payment made)
For Seller
(Being Down Payment received)
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JOURNAL ENTRIES FOR INSTALLMENT PURCHASE
TRANSACTION
In the Books of Purchaser In the Books of Seller
Seller’s a/c Dr.
To Cash/Bank a/c
Cash/Bank a/c Dr.
To Purchaser’s a/c
Particulars L.F. Debit Credit
B’s a/c Dr.
To Bank a/c a/c
40,000
40,000
Particulars L.F. Debit Credit
Bank a/c Dr.
To A’s a/c a/c
40,000
40,000

12.  For Interest due on Cost price
Example:
Interest is charged by B at 5%.
For Purchaser
(Being Interest due)
For Seller
(Being Interest Due)
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JOURNAL ENTRIES FOR INSTALLMENT PURCHASE
TRANSACTION
In the Books of Purchaser In the Books of Seller
Interest a/c Dr.
To Interest Suspense a/c
Interest Suspense a/c Dr.
To Interest a/c
Particulars L.F. Debit Credit
Interest a/c Dr.
To Interest Suspense a/c
5450
5450
Particulars L.F. Debit Credit
Interest Suspense a/c Dr.
To Interest a/c
5450
5450

13.  For Payment/Receipt of Installment
Example:
The payment was made in 3 equal installments of Rs. 40,000 each.
For Purchaser
(Being payment of Installment)
For Seller
(Being payment of Installment received)
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JOURNAL ENTRIES FOR INSTALLMENT PURCHASE
TRANSACTION
In the Books of Purchaser In the Books of Seller
Seller’s a/c Dr.
To Cash/Bank a/c
Cash/Bank a/c Dr.
To Purchaser’s a/c
Particulars L.F. Debit Credit
B’s a/c Dr.
To Bank a/c a/c
40,000
40,000
Particulars L.F. Debit Credit
Bank a/c Dr.
To A’s a/c a/c
40,000
40,000

14.  For charging Depreciation(at the end of year)
Example:
The buyer charges depreciation at 10% p.a.
For Purchaser
(Being depreciation charged at 10% p.a.)
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JOURNAL ENTRIES FOR INSTALLMENT PURCHASE
TRANSACTION
In the Books of Purchaser In the Books of Seller
Depreciation a/c Dr.
To Asset a/c
No Entry
Particulars L.F. Debit Credit
Depreciation a/c Dr.
To Machine a/c
14,900
14,900

15.  For closure of Depreciation and Interest
Example:
For Purchaser
(Being expenses charged to Profit and loss a/c)
For Seller
(Being interest amount transferred to Profit and Loss a/c)
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JOURNAL ENTRIES FOR INSTALLMENT PURCHASE
TRANSACTION
Particulars L.F. Debit Credit
Profit and Loss a/c Dr.
To Depreciation a/c
To Interest a/c
20,350
14,900
5450
In the Books of Hire Purchaser In the Books of Hire Vendor
Profit & Loss a/c Dr.
To Depreciation a/c
To Interest a/c
Interest a/c Dr.
To Profit & Loss a/c
Particulars L.F. Debit Credit
Interest a/c Dr.
To Profit & Loss a/c
5450
5450