"Hire Purchase": Financial Accounting Submitted by Jay Karan Yadav

Download as docx, pdf, or txt
Download as docx, pdf, or txt
You are on page 1of 10

Dr.

SHAKUNTALA MISRA NATIONAL REHABILITATION UNIVERSITY

LUCKNOW

Faculty of Law

“Hire Purchase”
Financial Accounting

Submitted by
Jay Karan Yadav
B.Com.LL.B(HONS) 1st SEM

Under the Supervision of

Mr. Sageer Ahmad sir


Faculty of Law,

Dr. SHAKUNTALA MISRA NATIONAL REHABILITATION UNIVERSITY

LUCKNOW
ACKNOWLEDGEMENT

I would like to convey my heartfelt gratitude to ‘Mr. sageer


Ahmad sir’ for her tremendous support and assistance in the
completion of my project. and for providing me with this
wonderful opportunity to work on a project with the topic ‘HIRE
PURCHASE’ The completion of the project would not have
been possible without their help and insights.

Jay Karan Yadav


Table of Contents

 Meaning of Hire Purchase


 Features Of Hire Purchase
 Concept of hire Purchase
 Characteristics of Hire-Purchase System
 Legal Position of Hire Purchase

 Advantages Of Hire Purchase


 Disadvantages Of Hire Purchase
 Bibliography
Meaning of Hire Purchase

Hire purchase means a transaction where goods are purchased and sold on the terms that:
Payment will be made in installments,The possession of the goods is given to the buyer immediately,The
property (ownership) in the goods remains with the vendor till the last installment is paid,The seller can
repossess the goods in case of default in payment of any installment, and Each installment is treated as
hire charges till the last installment is paid.

Features of Hire Purchase

The main features of a hire purchase agreement are as below:


1. The payment is to be made by the hirer (buyer) to the hiree, usually the vendor, in
installments over a specified period of time.
2. The possession of the goods is transferred to the buyer immediately.
3. The property in the goods remains with the vendor (hiree) till the last installment is paid.
The ownership passes to the buyer (hirer) when he pays all installments.
4. The Hiree or the vendor can repossess the goods in case of default and treat the amount
received by way of installments as hire charged for that period.
5. The installments in hire purchase include interest as well as repayments of principal.
6. Usually, the hiree charges interest on flat rate.

Concept of Hire Purchase System


Hire purchase system refers to the system wherein, the seller of goods delivers the goods to the
buyer without transferring the ownership of goods. The purchase and sale of goods under a hire
purchase system are different from cash sale and credit sale. In case of a cash sale, the buyer
pays the lump sum to the seller and immediately ownership is passed along with the goods.
Under this system, the purchaser pays the price of the goods in installments. While in credit sale
the payment is made in the future. The payment for the goods will be made by the buyer in
installments. In both cases, the ownership and possession of goods pass on the buyer. However, a
hire purchase system is a special system of purchase and sale. If the buyer pays all the
installments, the ownership of the goods will be transferred, on payment of the last installment.
Thus hire-purchase means a transaction where the goods are sold by vendor to the purchaser
under the following conditions :
 The goods will be delivered to the purchaser at the time of the agreement.
 The purchaser has a right to use the goods delivered.
 The price of the goods will be paid in installments.
 Every installment will be treated to be the hire charges of the goods which are being used
by the purchaser.
 If all installments are paid as per the terms of the agreement , the title of the goods is
transferred by a vendor to the purchaser.

Characteristics of Hire-Purchase System


 Hire-purchase is a credit purchase.
 The price under the hire-purchase system is paid in installments.
 Hire vendor continues to be the owner of the goods till the payment of the last
installment.
 The hire-purchaser has a right to use the goods as a bailer.
 The hire-purchaser has a right to terminate the agreement at any time in the capacity of a
hirer.

Legal Position of Hire Purchase:


The Hire Purchase Act, 1972 defines a hire purchase agreement as an agreement under
Which goods are let on hire and under which the hirer has an option to purchase them in

Accordance with the terms of the agreement and includes an agreement under which:

(i) Possession of goods is delivered by the owner there off to a person on a condition that
such person pays the agreed amount in periodic payment.
(ii) The property in the good is to pass tosuch perso on payment of the last of such
installments.
(iii) Such person has a right to terminate the agreement at any time before the property so
passes.” Section 3 of the Act provides that every hire purchase agreement must be in
writing and signed by all parties .

In addition to the usual right of terminating the agreement at any time before the property
passes to him and returning the goods to the hiree, the Hire Purchase Act, 1972 has provided
the following rights to the hirer:

(i) The hiree (vendor) cannot terminate the hire purchase agreement for default in payment of
hire or due to an un-authorised act or breach of expressed conditions unless a notice in writing
in this regard is given to the hirer. The period of notice will be one week where the hire is
payable weekly or less than that interval and two weeks in other cases.

(ii) The right to repossess the goods will not exist unless sanctioned by the Court in the
following cases:

(a) Where the hire purchases price is less than Rs. 15,000, one half of the hire purchase price
has been paid
(b) Where the hire purchase is not less than Rs. 15,000, three fourth of hire-purchase price has
been paid.

However, this proportion in case of motor vehicles is as under:


(a) One half, where the hire purchase price is less than Rs. 5,000.
(b) Three fourths, where the hire purchase price is not less than Rs. 5,000 but less than Rs.
15,000.
(c) Three fourths or such higher proportion not exceeding nine-tenth where the hire purchase
price is not less than Rs. 15,000.

(iii) The hirer has a right of receiving a statement from the owner against a payment of rupee
one showing the amount paid by or on behalf of the hirer, the amount which has become due
under the agreement but remains unpaid and the date upon which each unpaid installment
became due, and the amount of each such installment and the amount which is to become
payable under the agreement and the date or the mode of determining the date upon which each
future installment is to become payable, and the amount of each such installment.

(iv) If the amount paid by the hirer till the date of repossession of the goods or the value of the
goods on the date of repossession of goods exceeds the total hire purchase price the excess
payment made by the hirer will be returned to the hirer by the owner of the goods.
The owner or vendor, for the purpose of calculating the value of the goods, has the right to
deduct the reasonable expenses for repossessing the goods, for storing the goods, or repairing
Them, for selling them and for payment of arrears of taxes.

Method of Computing Installment under Hire Purchase:

Under Hire Purchase, interest is usually charged on a flat rate for the period of hire. We can

Calculate the amount of installment by adding the amount of principal (cost of the asset) and

The total interest for the period, and further by dividing the total amount of payment to be made

By the number of installments.

Say, an equipment costing Rs. 1,00,000 is sold on hire purchase on the terms that interest will

Be charged at 15% p.a. on flat rate basis and the payment is to be made in 5 equal year-end

Installments.
In the above example, the total Interest burden shall be Rs. 75,000 i.e. 1,00,000 × 15/100 × 5

And the yearly installment shall be 1,00,000 + 75,000/5 = Rs. 35,000

Method of Splitting H.P. Installment into Interest and Principal Repayments:

(a) First of all interest included in each installment is calculated on the basis that interest in

Each installment shall be in ratio of amounts outstanding. In case the installments are of equal

Amounts, we can apply the sum of digit method.

(b) We can determine the amount of principal repayment in the installment by deducting
from

It the amount of interest calculated in (a) above.

The following illustration explains the method of split of hire purchase installment into

Interest and principal repayments:

Illustration 1:

A company purchased an equipment costing Rs. 5,00,000 on hire purchase basis payable in 4
Equal year end installments of Rs. 2,05,000 each. Split of the Installments into interest and
Principal repayments.
Solution:

In the above Illustration, the total amount payable is Rs. 8,20,000-5,00,000.


Advantages

 Financing of an asset through hire purchase is very easy.


 The hire purchaser becomes the owner of the asset in the future.
 Hire purchaser gets the benefit of depreciation on asset hired by him/her.
 Hire purchasers also enjoy the tax benefit on the interest payable by them.

Disadvantages

Ownership of assets is transferred only after the payment of the last installment.The magnitude
of funds involved in hire purchase is very small and only small types of assets like office
equipment, automobiles, etc., are purchased through it.The cost of financing through hire
purchase is very high.
Bibliography

 www.topper.com
 www.ipleader.com
 www.cleartax.com
 www.vakilsearch.com
 www.vedantu.com

You might also like