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Hire Purchase, Lease and Installment Purchase Systems

Concept of Hire Purchase
Purchase and sale of goods under a hire purchase system is different from cash sale and credit sale. In
case of cash sale, the buyer pays the lump sum to the seller and immediately ownership is passed along
with the goods. While in credit sale the payment is made in future. In these both cases the ownership
and possession of goods pass on the buyer. However, hire purchase system is a special system of
purchase and sale.
In hire purchase system, the buyer acquires the property by promising to pay necessary installment
payment of monthly, quarterly, half yearly or any other period. The period of payment has to be fixed
while, signing the hire sell agreement. Though, the buyer acquires the asset under hire purchase system
after signing the agreement, the title of ownership remains with vendor until the buyer squares up
his/her entire liability.
When the buyer pays the final installment and any other obligation according to hire purchase
agreement, only then the title of ownership of the goods would be transferred to hirer. If the hirer
makes default in the payment of any installment, the hire vendor has the right to re-possess the goods.
When the vendor re-possesses the goods due to the default of payment of installment, in this case the
amount already paid so far by the hirer will be forfeited.
Features Of Installment Purchase System
1. Installment purchase system is just like an outright credit sale of goods.
2. The buyer makes the payment in different installment over a period of time as agrees upon in
the agreement.
3. Under installment purchase system, the buyer gets the immediate possession as well as the
ownership of goods.
4. The seller cannot responses the good if the buyer made default in the payment of installment
but he/she can sue against the buyer for the recovery of amount due.
5. In case of default in the payment of installment, the total amount of installments already paid
by the buyer cannot be forfeited.
6. Under installment system, the buyer can sell or mortgage the goods even before clearing all the
installments.
7. Risks of goods/assets are to be borne by the buyer just after signing the agreement.
8. The buyer of the goods under installment purchase system has no right to return the goods to
the seller.

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Important Terminologies Of Accounting For Hire Purchase System
1. Hire seller/Hire vendor/Owner:A person who sells the goods to the buyer under hire purchase system
is known as hire seller.
2. Hirer/Hire purchaser/Hire buyer: The person who purchase goods from hire vendor or who obtains
the goods from an owner under hire purchase agreement is known as hirer.
3. Cash price/Cash value: It is a value of goods at which the goods may be purchased by the hirer for
cash.
4. Down Payment: The initial cash payment made by the hire purchaser to the vendor at the time of
signing the hire purchase agreement is referred as down payment.
5. Hire Purchase Price: The hire purchase price includes the cash price and interest to be paid on the
future installment. It is the total sum payable by the hirer to the vendor.
6. Hire Purchase Charge: The difference between the hire purchase price and the cash price as stated in
the hire purchase agreement is known as hire purchase charge.
Form and Contents of Hire Purchase Agreements
Every hire purchase agreement should state the following:
1. The hire purchase price of the goods to which the agreement relates.
2. Cash price of such goods
3. The date on which the agreement shall be deemed to have commenced.
4. The number of installments in which the hire purchase price is to be paid, the amount of each of
those installments, the date or mode of determining the date upon which it is payable and the
person to whom and the place where it is payable.
5. The goods to which the agreement relates in a manner sufficient to identify them.
Limitation on Hire Purchase Charges
They are calculated in respect of each of the cash price instalment corresponding to each of the hire
purchase system. The statutory charges should be lower of the following two limits:
a) The amount calculated at 30% of each cash price instalment
b) The amount calculated is according to

SC is statutory charges
CI is the amount of cash price installment expressed in rupees or fraction thereof.
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R is 10% or such higher rate as may be determined by the Central Government in consultation with RBI.
T is time expressed in years.
Right of the Hirer to Purchase with Rebate
The hirer may at any time by giving at least 14 days to the owner, complete the purchase of the goods.
He will have to pay or render to the owner the hire purchase price or the balance thereof as reduced by
the rebate calculated using:

Termination of Hire Purchase Agreement
The ire purchaser may at any time terminate the hire purchase agreement after giving the owner at
least 14 days notice in writng. The following provisions have been made in Hire Purchase Act:
a) Where the sum total of the amounts paid and amount due in respect of the hire purchase price
immediately before the termination exceeds one-half of the hire purchase price, the hirer shall
not be liable to pay the sum so named.
b) Where the sum total of the amounts paid and the amounts due in respect of the hire purchase
price immediately before the termination does not exceed one-half of the hire purchase price,
the hirer shall be liable to pay the difference between the said sum total and the said one-half or
the sum named in the agreement, whichever is less.
Example 1
ABC Company purchases a machine on the hire purchase system over a period of 5 years, payable by
annual installments of Rs. 10000. The vendor charges 10% per annum on the annual balances. The cash
value of the machine may be taken as the present value of the annuity of Re. 1 for 5 years at 10% per
annum. Reference to the annuity table shows that the present value of Re. 1 for five years at 10% per
annum is Rs. 3791. Calculate the cash price and the amount of interest included in each installment.
Solution 1
In this case, cash price of the asset is calculated on the basis of the present value of the annuity of one
rupee for five years at 10% which is Rs. 3791, calculated as:
Present value of Rs. 5 is Rs. 3791.
Hence the present value of Rs. 50000 will

Cash price of the machine is Rs. 37910.
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Year Particulars Amount
Year 1 Cash price outstanding 37910
Add: Interest @10% pa 3791
41701
Less: 1st installment paid at end of the yr 10000

Year 2 Amount Outstanding in beginning of the yr 31701
Add: Interest @10% pa 3170
34871
Less: 2nd installment paid at end of the yr 10000

Year 3 Amount Outstanding in beginning of the yr 24871
Add: Interest @10% pa 2487
27358
Less: 3rd installment paid at end of the yr 10000

Year 4 Amount Outstanding in beginning of the yr 17358
Add: Interest @10% pa 1736
19094
Less: 3rd installment paid at end of the yr 10000

Year 5 Amount Outstanding in beginning of the yr 9094
Add: Interest @10% pa 906
10000
Less: 3rd installment paid at end of the yr 10000
Nil


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Accounting Entries
Books of the Hirer (When Asset is Recorded at Full Cash Price)
Sl No Particulars
1 On Purchase of Asset
Asset Account
To Hire Vendor
(with full cash price)
2 On making cash down payment
Hire Vendor
To Cash / Bank
(with actual cash down payment)
3 For Interest Due
Interest Account
To Hire Vendor

(Interest is calculated on o/s amount
when installment is due)
4
On payment of hire purchase
installment
Hire Vendor
To Cash / Bank
(with amount paid)
5 For depreciation of the asset
Depreciation account
To Asset Account
(at end of the accounting period)

Books of the Hirer (When Asset is Recorded at Cash Price actually Paid)
Sl No Particulars
1 On Cash Down Payment
Asset Account
To Cash / Bank
(with amount of cash down payment)
2 On Hire purchase installment due
Asset Account
Interest Account
To Hire Vendor
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(Asset account is debited, with amount
of cash price in each installment. The
interest on outstanding cash price is
debited to the interest account)
3 On making payment of the installment
Hire Vendor
To Cash / Bank
(with amount of installment paid)
4 For depreciation of the asset
Depreciation account
To Asset Account

(Depreciation is charged on full cash
price of the asset)

Sl No Particulars
1 On sale of goods under hire purchase
Hire purchaser account
To Sales Account
(with full cash price)
2 On receiving cash down payment
Cash / Bank Account
To Hire Purchaser
(with amount of cash down payment)
3 For Interest Due
Hire purchaser account
To Interest Account

(Interest is calculated when any
installment becomes due on the
outstanding balance in the account of
the hire purchaser)
4 On getting payment of Installment
Cash / Bank Account
To Hire Purchaser

(with the amount of installment
received)


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Example 1
On 1
st
January 1992, A Ltd purchased from B Ltd five trucks under hire purchase system, Rs. 50000 being
paid on delivery and the balance in five installments of Rs. 75000 each payable annually on 31
st

December. The vendor charges 5% per annum interest on yearly balances. The cash price on five trucks
was Rs. 375000.
Show how this transaction should be recorded in the books of both companies, if A ltd writes off
depreciation at 10% per annum on the written down value. Also show how the items will appear
balance sheet as on 31
st
December 1992.
Solution 1
Books of A (First Method)
Date Particulars Amount Date Particulars Amount
1992
Jan To B Ltd 375000
1992
Dec By Depreciation 37500
By Bal c/d 337500
375000 375000
1993
Jan To Balance b/d 337500
1993
Dec By Depreciation 33750
By Bal c/d 303750
337500 337500
1994
Jan To Balance b/d 303750
1994
Dec By Depreciation 30380
By Bal c/d 273370
303750 303750
1995
Jan To Balance b/d 273370
1995
Dec By Depreciation 27340
By Bal c/d 246030
273370 273370
1996
Jan To Balance b/d 246030
1996
Dec By Depreciation 24600
By Bal c/d 221430
246030 246030

B Ltd
Date Particulars Amount Date Particulars Amount
Jan-92 To Cash a/c 50000 Jan-92 By Truck a/c 375000
Dec-92 To Cash a/c 75000 Dec-92 By Interest a/c 16250
To Balance c/d 266250 (5% on 325000)

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391250 391250
Dec-93 To Cash a/c 75000 Jan-93 By Bal b/d 266250
To Balance c/d 204560 Dec-93 By Interest a/c 13310


(5% on 266250)

279560 279560
Dec-94 To Cash a/c 75000 Jan-94 By Bal b/d 204560
To Balance c/d 139790 Dec-94 By Interest a/c 10230


(5% on 204560)

214790 214790
Dec-95 To Cash a/c 75000 Jan-95 By Bal b/d 139790
To Balance c/d 71780 Dec-95 By Interest a/c 6990


(5% on 204560)

146780 146780
Dec-96 To Cash a/c 75000 Jan-96 By Bal b/d 71780


Dec-96 By Interest a/c 3220


(5% on 204560)

75000 75000

Interest Account
Date Particulars Amount Date Particulars Amount
Dec-92 To B ltd 16250 Dec-92 By P&L a/c 16250
Dec-93 To B ltd 13310 Dec-93 By P&L a/c 13310
Dec-94 To B ltd 10230 Dec-94 By P&L a/c 10230
Dec-95 To B ltd 6990 Dec-95 By P&L a/c 6990
Dec-96 To B ltd 3220 Dec-96 By P&L a/c 3220

Balance Sheet
Liabilities Amount Assets Amount

Trucks on Hire
Purchase 375000
Less: Depreciation 37500
337500
Less: Due to B Ltd 266250 71250


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Books of A (Second Method)
Date Particulars Amount Date Particulars Amount
Jan-92 To Cash 50000 Dec-92 By Depreciation 37500
Dec-92 To Cash 58750 (10% on 375000)
By Bal c/d 71250
108750 108750
Jan-93 To Bal b/d 71250 Dec-93 By Depreciation 33750
Dec-93 To Cash 61690 (10% on 337500)
By Bal c/d 99190
132940 132940
Jan-94 To Bal b/d 99190 Dec-94 By Depreciation 30380
Dec-94 To Cash 64770 (10% on 303800)
By Bal c/d 133580
163960 163960
Jan-95 To Bal b/d 133580 Dec-95 By Depreciation 27340
Dec-95 To Cash 68010 (10% on 273400)
By Bal c/d 174250
201590 201590
Jan-96 To Bal b/d 174250 Dec-96 By Depreciation 24600
Dec-96 To Cash 71780 (10% on 246000)
By Bal c/d 221430
246030 246030

Interest Account
Date Particulars Amount Date Particulars Amount
Dec-92 To Cash 16250 Dec-92 By P&L a/c 16250
Dec-93 To Cash 13310 Dec-93 By P&L a/c 13310
Dec-94 To Cash 10230 Dec-94 By P&L a/c 10230
Dec-95 To Cash 6990 Dec-95 By P&L a/c 6990
Dec-96 To Cash 3220 Dec-96 By P&L a/c 3220





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Balance Sheet
Liabilities Amount Assets Amount
Trucks on Hire Purchase 108750
Less: Depreciation 37500 71250

Books of B LTd
Date Particulars Amount Date Particulars Amount
Jan-92 To Sales a/C 375000 Jan-92 By Cash 50000
Dec-92 To Interest a/c 16250 Dec-92 By Cash 75000


By Bal c/d 266250
391250

391250
Jan-93 To Bal b/d 266250 Dec-93 By Cash a/c 75000
Dec-93 To Interest a/c 13310 Dec-93 By Balance c/d 204560
279560

279560
Jan-94 To Bal b/d 204560 Dec-94 By Cash a/c 75000
Dec-94 To Interest a/c 10230 Dec-94 By Balance c/d 139790
214790

214790
Jan-95 To Bal b/d 139790 Dec-95 By Cash a/c 75000
Dec-95 To Interest a/c 6990 Dec-95 By Balance c/d 71780
146780

146780
Jan-96 To Bal b/d 71780 Dec-96 By Cash a/c 75000
Dec-96 To Interest a/c 3220


75000 75000
Sales Account
Date Particulars Amount Date Particulars Amount
Dec-92 To Trading a/c 375000 Jan-92 By A ltd 375000
Interest Account
Date Particulars Amount Date Particulars Amount
Dec-92 To P&L a/c 16250 Dec-92 By A Ltd 16250
Dec-93 To P&L a/c 13310 Dec-93 By A Ltd 13310
Dec-94 To P&L a/c 10230 Dec-94 By A Ltd 10230
Dec-95 To P&L a/c 6990 Dec-95 By A Ltd 6990
Dec-96 To P&L a/c 3220 Dec-96 By A Ltd 3220