"Hire Purchase": Financial Accounting Submitted by Jay Karan Yadav
"Hire Purchase": Financial Accounting Submitted by Jay Karan Yadav
"Hire Purchase": Financial Accounting Submitted by Jay Karan Yadav
LUCKNOW
Faculty of Law
“Hire Purchase”
Financial Accounting
Submitted by
Jay Karan Yadav
B.Com.LL.B(HONS) 1st SEM
LUCKNOW
ACKNOWLEDGEMENT
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.
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.
(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.
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
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
(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
(b) We can determine the amount of principal repayment in the installment by deducting
from
The following illustration explains the method of split of hire purchase installment into
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:
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