2. MEANING:-
Goods purchased on the basis of installment is known as
hire purchase. There are two main persons i. Hire purchaser
ii. Hire vendor.
A contract of hire purchase is a contract where goods are
purchased or sold with the terms that,
a) The delivery of the goods will be given by the owner of the
goods to the hire purchaser.
b) The payment of the price for the goods will be made in
installment.
c) Ownership of the goods pass to the hire purchaser only on
payment of all installment.
d) The hire vendor will be entitled to seize the goods in case hire
purchaser fails to make payment of installment due.
e) Hire vendor will delivery only the goods to the hire purchaser
and not the ownership.
3. The agreement between the hire purchaser
and hire vendor is called ‘Hire purchase
agreement’.
The total payment made by the hire
purchaser under this system is always more than
the cash price of the goods because it includes
interest charges.
a)Cash price:- It is the amount for which an article
can be purchased for cash.
b)Hire purchase price = Cash price + interest.
c) Down payment:- It is the amount paid by the
hire purchaser to the hire vendor at the time of
signing the contract, which is the part of the
hire purchase price.
4. What do you mean by installment system?
It is the system under which goods are
sold on installment basis in which the buyer
undertakes to pay the price of the goods in
installment together with interest.
NOTE:- In this case the ownership of the goods
will pass to the buyer on signing the contract
itself.
5. HIRE PURCHASE INSTALLMENT
I. The parties to the contract
are called as hire purchaser
and hire vendor.
II. Ownership of the goods will
be transferred when last
installment is paid.
III.In case of default, the hire
vendor can seize or take back
position of the goods.
IV.Hire purchaser can terminate
the contract but he cannot
claim the amount paid.
I. The parties to the contract
are called as buyer and seller.
II. Ownership will be transferred
immediately after signing the
contract.
III.The seller cannot take back
position, but he can sue the
buyer for payment due.
IV.The buyer cannot terminate
the contract and he cannot
escape from the liability.
6. 1. At the time/on the date of signing the agreement:
a) For recording the purchase:
Asset a/c DR.
To Hire vendor a/c
b) For recording the down payment:
Hire vendor a/c DR.
To Cash a/c
2. At the time of each installment:
a) For recording interest due:
Interest a/c DR.
To Hire vendor a/c
7. b) For payment of installment:
Hire vendor a/c DR.
To Cash/bank a/c
c) For charging depreciation:
Depreciation a/c DR.
To asset a/c
d) For transferring depreciation and interest:
P&L a/c DR.
To Depreciation a/c
To Interest a/c
8. 1. At the time of signing the agreement:-
a) For recording the credit sales:
Hire purchaser a/c DR.
To Sales a/c
b) For receiving the down payment:
cash a/c DR.
To Hire purchaser a/c
2. At the end of each installment:-
a) For recording interest due:
Hire purchaser a/c DR.
To Interest a/c
9. b) For receipt of the installment amount:
Cash/bank a/c DR.
To Hire purchaser a/c
c) For transferring interest:
Interest a/c DR.
To P&L a/c
10. Under hire purchase system, the purchaser is required
to pay interest on the outstanding balance of cash price at the
time of paying installment amount. Hence, it is necessary to
know the method of calculating interest.
The interest can be calculated in four methods:-
1. When the total cash price, the amount of each installment
and the rate of interest is given.
outstanding balance of cash price X rate of interest
100
2. When the total hire purchase price amount payable towards
cash price of the asset and the rate of interest is given.
Hire purchase price - Interest = cash price.
11. 3. When the total cash price and each installment amount is
given but the rate of interest in not given.
Total cash price - Installment cash price
number of equal installments
4. When the amount of each installment and the rate of
interest are given but the cash price of the asset is not
given.
NOTE:- Under this method, the interest portion and cash
price portion is to be calculated from last installment to the
first installment.
last installment amount due X rate of interest
100 + rate of interest
12. PROBLEM:-
Arun purchased from Ravi a machine on hire
purchase system for rs.2,400 to be paid as following on
delivery rs.800. At the end of 1st year rs.760, 2nd year
rs.600, 3rd year rs.350, 4th year rs.220. Interest charged
@10% per annum.
13. Ascertainment of the interest and cash price of the asset.
SL.
no
PARTICULARS CASH PRICE HIRE
PURCHASE
PRICE
INTERE
ST
INTEREST
CALCULATION
1. Down payment
(Outstanding
balance)
800 (2400-
800=1600)
- - -
2. 1st installment 600 760 160 760+200+300+500
=1760x10/110
=160
3. 2nd installment 500 600 100 600+300+200=
1100x10/110
=100
4. 3rd installment 300 350 50 350+200
=550x10/110
=50
5. 4th installment 200 220 20 220x10/110
=20
2400 330
