Faculty Of Commerce, The Maharaja Sayajirao University Of Baroda

F.Y BBA
FINANCIAL ACCOUNTING
UNIT 3 HIRE PURCHASE AND INSTALLEMENT PURCHASE SYSTEM

HIRE PURCHASE SYSTEM

Definition
“Under the Hire-Purchase system, goods are delivered to the buyer (called the “Hire-
purchaser”) in return for his undertaking to pay agreed amounts at specified intervals for a
certain period, and on the understanding that at the end of that period when the payments
completed, the goods become his absolute property.” (Principles and Practice of book-keeping
and Accounts by B.G. Vickery).
“By hire-purchase is meant the system under which property is acquired by payments made in
instalments, during the period of which title in the property remains with the hire vendor. The
payments made till the final instalment are regarded as being purely in respect of hire, and the
title in the property does not pass to the hire-purchaser until such final payment or some other
consideration provided for in the contract has been fulfilled.” (Accountancy by Pickles).
If we analyse the above definitions we find that a contract of hire-purchase has the following
characteristics.
(a) Instantaneous delivery of goods : In the case of hire-purchase contracts, the seller is
supposed to hand over the possession of goods to the hire-purchaser immediately after the
singing of the agreement.
(b) Payment in instalments: Under a hire-purchase contact the payment for the goods sold is
stipulated to be paid by the hire-purchaser in instalments. These instalments may be of fixed
sums or of varying amounts depending upon the agreement entered into between the two
parties.
(c) Interest: Since the payment for the goods is deferred. Some interest is usually charged by
the hire vendor. Such interest is assumed to be included in the instalments unless the agreement
specifically provides otherwise.
(d) Deferment of transfer of property : The hire vendor parts with the possession of his goods
but not with the ownership to the hire-purchaser. The goods so delivered remain the property
of the hire vendor until the whole of the payments are completed.
(e) Right to repossess in case of default: As the property in the goods does not pass to the
hire-purchaser, the hire vendor has the right to repossess the goods so delivered in case the hire
purchaser makes a default in the payment of any instalment. The instalments already paid by
the hire-purchaser in such a case will be treated as hire for the commodity used by him. This
means the hire vendors usually not supposed to refund any of the amounts already received by
him on repossession of goods for non payment of any of the instalments by the hire-purchaser.
Alternatively, under certain conditions the hire purchaser may be allowed to retain a certain
part of the property, or the hire vendor may make an allowance for the property returned
(f) Instalments to be treated as hire : As said above every instalment (except the last on e) is
treated as hire for the use of goods as against the purchase price thereof. But with the payment
 of the last instalment, every prior instalment is retrospectively treated as a payment for the price
of the goods so delivered.
(g) Liability for the outstanding instalments : The hire-purchaser, under a hire purchase
agreement, is liable for the outstanding (due but unpaid) instalments even after the seller
decides to repossess the goods for non-payment of the instalment by the hire-purchaser.
(h) Liability for future or undue liability : The hire-purchaser is not required to pay the future
or undue instalments once the goods are repossessed by the hire-vendor.
(i) Undertaking by the hire purchaser : The hire-purchaser cannot sell, destroy, damage,
exchange or pledge the goods until the final payment he frequently has to undertake to keep
the goods in sound repair and good condition until the last payment is made. Whereas the hire
purchaser has the option to buy, the hire-vendor is bound to sell.
Important Terms:
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.

Accounting Entries:
The method follows a practical approach and practically treats ‘Hire Purchaser as owner of an
asset’. Under this method, the asset is to be recorded at full cash price on the basis of ‘substance
over form’. This method is more appropriate since the intention of a Hire Purchaser is to buy
the asset. The accounting entries are as follows

Transaction Books of Hire Books of Hire Vendor Amt. to be Debited or

Purchaser Credited)
For Purchase/sale of the Asset A/c Dr. Hire Purchaser’s A/c Dr. Full Cash Price of the asset
Asset /goods To Hire Vendor’s A/c To Hire Purchase Sales A/c
For making/ receiving Hire Vendor’s A/c Dr. Cash/Bank A/c Dr. Cash Down Payment
Cash Down Payment To Cash/Bank A/c To Hire Purchaser’s A/c
For Interest due Interest A/c Dr. Hire Purchaser’s A/c Dr. Interest on Outstanding
To Hire Vendor’s A/c To Interest A/c amt.
For Payment / Receipt Hire Vendor’s A/c Dr. Cash/Bank A/c Dr. Installment
of Hire purchase To Cash/Bank A/c To Hire Purchaser’s A/c
Installment
 For charging Depreciation A/c Dr. No Entry Depreciation under
Depreciation To Asset A/c specified method
(At the end of year)
For closure of Dep. A/c Profit & Loss A/c Dr. No Entry Depreciation
(At the end of year) To Depreciation A/c
For closure of Interest Profit & Loss A/c Dr. Interest A/c Dr. Interest
a/c (At the end of year) To Interest A/c To Profit & Loss A/c

Default and Repossession

When Hire purchaser fails to pay the installment, the hire vendor may seize the goods and
forfeit all amounts paid by the hire purchaser. Seizure of the goods may be partial or full
depending upon the agreement. In case of partial seizure, only a part of the amount paid by the
hire purchaser will be forfeited by the hire vendor. The hire vendor may get the goods repaired
and reconditioned and later sell them to other customer. The accounting entries are as follows:

Transaction Books of Hire Books of Hire Vendor Amt. with A/c (Debited or
Purchaser Credited)
For Asset Repossessed Hire Vendor’s A/c Dr. Asset/Goods Repossessed Dr. Full Seizure: Amt.
(Accounts to be closed) To Asset A/c To Hire Purchaser’s A/c standing to the credit of
Hire Vendor/ amt due from
the Hire-Purchaser
Partial Seizure: With the
value agreed
For reconditioning of the No Entry Asset Repossessed Dr. Reconditioning Expenses
Asset Repossessed To Cash A/c
For sale of Asset No Entry Cash/Bank A/c Dr. Sales price of the asset sold
Repossessed To Asset Repossessed A/c
For (a) Loss on Asset : Profit & Loss A/c Dr. Profit & Loss A/c Dr. Loss on Asset
To Asset A/c To Asset Repossessed A/c
For (b) Profit on Asset : (Reverse above entry) (Reverse above entry) Profit on Asset
(On repossession of (Asset A/c closed) (Repossessed Asset a/c
asset) closed)

CALCULATION OF INTEREST :
I When both the Cash Price and the Rate of Interest are given, the interest is calculated
as follows:
Date Particulars (Rs.)
A Cash Price of the Asset............................................... xxxxx
B Less : Down Payment................................................. xxxxx
C Cash Price due in the beginning of installment period xxxxx
D Add : Interest on Cash Price due............................... xxxxx
E Total amount due before payment of Installment......... xxxxx
F Less : Installment paid................................................ xxxxx
G Cash Price due in the beginning of installment period xxxxx
H Interest on Cash Price due.......................................... xxxxx
Note: Repeat Steps E, F, G and H for each of the given Installment.
Ex 1. Unique Ltd purchased a machine on 30.09.2020 from Power Tech Ltd on hire purchase
system. The cash price of the machine was Rs 6,80,000. The agreement provided that he
would pay Rs 1,60,000 for the delivery of the machine and the balance in 6 half-yearly
instalments of Rs 96,000 each. Power Tech Ltd charges interest at 6% p.a. on half yearly
balances. The buyer closed his books of accounts on 31st March every year. Unique Ltd
provided depreciation @ 10% p.a. on the diminishing balances method. Show the
necessary ledger accounts in the books of Unique Ltd.
SOLUTION
SOLUTION 1: In the books of Unique Ltd
Machine A/c
Date Particulars Rs Date Particulars Rs
30/09/2020 To Power Tech 680000 31/03/2021 By Depreciation A/c 34000
Ltd A/c
31/03/21 By b/s c/d 646000
Total 680000 Total 680000
1/04/21 To b/s b/d 646000 31/03/22 By Depreciation A/c 64600
31/03/22 By b/s c/d 581400
Total 646000 Total 646000
1/04/22 To b/s b/d 581400 31/03/23 By Depreciation A/c 58140
31/03/23 By b/s c/d 523260
Total 581400 Total 581400
1/04/23 To b/s b/d 523260 31/03/24 By Depreciation A/c 52326
31/03/24 By b/s c/d 470934
Total 523260 Total 523260

Power Tech Ltd A/c

Date Particulars Rs Date Particulars Rs

30/09/2020 To Bank A/c 160000 30/09/2020 By Machine A/c 680000
31/03/21 To Bank A/c 96000 31/03/21 By Interest A/c 15600
31/03/21 To b/s c/d 439600
Total 695600 Total 695600
30/09/21 To Bank A/c 96000 1/04/021 By b/s b/d 439600
31/03/22 To Bank A/c 96000 30/09/21 By Interest A/c 13188
31/03/22 To b/s c/d 271491 31/03/22 By Interest A/c 10703
Total 463491 Total 463491
30/09/22 To Bank A/c 96000 1/04/22 By b/s b/d 271491
31/03/23 To Bank A/c 96000 30/09/11 By Interest A/c 8145
31/03/23 To b/s c/d 93145 31/03/23 By Interest A/c 5509
Total 285145 Total 285145
30/09/23 To Bank A/c 96000 1/04/23 By b/s b/d 93145
By Interest A/c 2855
Total 96000 Total 96000
 Interest A/C

Date Particulars Rs Date Particulars Rs

31/03/21 To Power Tech Ltd A/c 15600 31/03/21 By P&L A/c 15600
Total 15600 Total 15600
30/09/21 To Power Tech Ltd A/c 13188 31/03/22 By P&L A/c 23891
31/03/22 To Power Tech Ltd A/c 10703
Total 23891 Total 23891
30/09/22 To Power Tech Ltd A/c 8145 31/03/23 By P&L A/c 13654
31/03/23 To Power Tech Ltd A/c 5509
Total 13654 Total 13654
30/09/23 To Power Tech Ltd A/c 2855 31/03/24 By P&L A/c 2855
Total 2855 Total 2855

Depreciation A/c

Date Particulars Rs Date Particulars Rs

31/03/2020 To Machine A/c 34000 31/03/2021 By P&L A/c 34000
Total 34000 Total 34000
31/03/2022 To Machine A/c 64600 31/03/2022 By P&L A/c 64600
Total 64600 Total 64600
31/03/2023 To Machine A/c 58140 31/03/2023 By P&L A/c 58140
Total 58140 Total 58140
31/03/2024 To Machine A/c 52326 31/03/2024 By P&L A/c 52326
Total 52326 Total 52326

WORKING NOTE:CALCULATION OF INTEREST

Particulars Rs
Cash Price 1/10/2020 680000
Less: Down payment1/10/2020 160000
Balance1/10/2020 520000
Add : Interest @6% up to 31/03/2021 15600
Balance31/03/2021 535600
Less: Installment paid 31/03/2021 96000
Balance 31/03/2021 439600
Add : Interest @6% up to 30/09/2021 13188
Balance 30/09/2021 452788
Less: Installment paid 30/09/2021 96000
Balance 30/09/2021 356788
Add : Interest @6% up to 31/03/2022 10703
Balance 31/03/2022 367491
Less: Installment paid 31/03/2022 96000
Balance 31/03/2022 271491
Add : Interest @6% up to 30/09/2022 8145
 Balance 30/09/20022 279636
Less: Installment paid 30/09/2022 96000
Balance 30/09/2022 183636
Add : Interest @6% up to 31/03/2023 5509
Balance 31/03/2023 189145
Less: Installment paid 31/03/2023 96000
Balance 31/03/2023 93145
Add : Interest up to 30/09/2023[96000-93145] 2855
Balance 30/09/2023 96000
Less: Installment paid 30/09/2023 96000

Calculation of Depreciation

Particulars Rs
Machine purchased on 30/09/2020 680000
Depreciation for 2020-21 [10%] 6 months 34000
Balance 1/4/2021 646000
Depreciation for 2021-22 [10%] [WDV] 64600
Balance 1/4/2021 581400
Depreciation for 2021-22 [10%] [WDV] 58140
Balance 1/4/2022 523260
Depreciation for 2022-23 [10%] [WDV] 52326
Balance 1/4/2023 470934

Ex. 4. Shiva Limited acquired a machine on 1/1/2020 from Shakti Limited on Hire Purchase
Basis. for Rs. 1,08,0000.

▪ Payment is to be made, Rs. 1,00,000 as down payment and 4 annual installments of Rs.
245000 each.
▪ Rate of interest is 8% p.a.
▪ Shiva Limited depreciates machine at 15% p.a. on WDV method.
▪ Due to financial difficulties, Shiva Limited failed to pay the installment due on
31/12/2022.
▪ Shakti took possession of machine and spent Rs. 15,500 for improvement and resold it
for Rs. 6,00,000.
▪ Books of accounts are to be closed on 31 st December every year by both the parties.
Prepare necessary ledger accounts in the books of Hire vendor and Hire purchaser.

INTEREST CALCULATION
Particulars Rs
Cash price of machine [1/1/2020] 1080000
Less: Down payment 100000
Balance 980000
Add: Interest@8% p.a 78400
Amt due before payment of 1st installment 1058400
Less: 1st Installment 31/12/2020 [245000+78400] 323400
 Cash price due before payment of 2nd Installment 735000
Add: Interest@8% p.a 58800
Amt due before payment of 2nd installment 793800
Less: 2nd Installment 31/12/2021 [245000+58800] 303800
Cash price due before payment of 3rd Installment 490000
Add: Interest@8% p.a 39200
Amt due before payment of 3rd installment (Cost of asset ) 529200
DEPRECIATION
Particulars Rs
Cash price of Machine 1080000
Depreciation @15% on 31/12/2020 162000
Book Value as on 1/1/2021 918000
Depreciation @15% on 31/12/2021 137700
Book Value as on 1/1/2022 780300
Depreciation @15% on 31/12/2022 117045
Book Value as on 31/12/2022 663255
Asset Repossessed at 529200
Loss on Repossession [663255-529200] 134055
WN
Particulars Rs
Machinery Repossessed at 529200
Add: Expenses incurred 15500
Total 544700
Machinery Resold 600000
Profit on resale [600000-544700] 55300

In The Books of Shiva Ltd

Machine A/C
Date Particulars Rs Date Particulars Rs
01/01/20 To shakti Ltd A/c 1080000 31/12/20 By Depreciation A/c 162000
31/12/20 By b/s c/d 918000
Total 1080000 Total 1080000
01/01/21 To Balance b/d 918000 31/12/21 By Depreciation A/c 137700
31/12/21 By b/s c/d 780300
Total 918000 Total 918000
01/01/22 To Balance b/d 780300 31/12/22 By Depreciation A/c 117045
31/12/22 By shakti Ltd A/c 529200
31/12/22 By P & L A/c 134055
Total 780300 Total 780300

Shakti ltd A/c

Date Particulars Rs Date Particulars Rs
1/01/2020 To cash / Bank A/c 100000 01/01/2020 By Machine A/c 1080000
31/12/2020 To cash/ Bank A/c 323400 31/12/2020 By Interest A/c 78400
31/12/2020 To b/s c/d 735000
Total 1158400 Total 1158400
31/12/2021 To cash/ Bank A/c 303800 1/1/2021 By Balance b/d 735000
31/12/2021 To b/s c/d 490000 31/12/2021 By Interest A/c 58800
Total 793800 Total 793800
 31/12/2022 To Machine A/c 529200 1/1/2022 By Balance b/d 490000
31/12/2022 By Interest A/c 39200
Total 529200 Total 529200

IN THE BOOKS OF Shakti LTD

Shiva ltd A/c
Date Particulars Rs Date Particulars Rs
1/01/2020 To H.P sales A/c 1080000 01/01/2020 By cash A/c 100000
31/12/2020 To Interest A/c 78400 31/12/2020 By cash A/c 323400
31/12/2020 By b/s c/d 735000
Total 1158400 Total 1158400
1/01/2021 To bal b/d 735000 31/12/2021 By cash A/c 303800
31/12/2021 To Interest A/c 58800 31/12/2021 By b/s c/d 490000
Total 793800 Total 793800
1/01/2022 To bal b/d 490000 31/12/2022 By goods 529200
repossessed A/c
31/12/2022 To Interest A/c 39200
Total 529200 Total 529200
GOODS REPOSSESSED A/C
Date Particulars Rs Date Particulars Rs
31/12/2022 To shiva Ltd A/c 529200 31/12/2022 By Cash A/c 600000
31/12/2022 To cash/bank 15500
[improvement exp]
31/12/2022 To P & L A/c 55300
Total 600000 Total 600000

EX 5
Brahma purchased seven trucks on hire purchase on 1 st July, 2016. The cash price of each truck
was Rs.50, 000. She was to pay 20% of the cash purchase price at the time delivery and the
balance in five half –yearly installments starting from 31st December, 2016 with interest at 5%
p.a. Brahma failed to pay the installment due on 30th June 2017. The Vendor allows Brahma
to keep four trucks on a condition that the value of the other 3 trucks would be adjusted against
the amount due. The trucks returned were valued at Rs. 40,500. Brahma charged depreciation
@ 20% p.a. Vendor after spending Rs.1, 000 on repairing, sold away all the three trucks for
Rs. 40,000.Show Trucks account and Vendor’s Account in the books of Brahma and Brahma
Account and trucks Repossessed Account in the books of the vendor, assuming that their books
are closed on the 30th June every year.

Solution 5
WN 1 INTEREST CALCULATION
Particulars Rs
Cash price on 1/07/2016 [50000 Rs*7 Trucks] 3,50,000
Less: Down payment 20% of Cash price 70,000
Amt due before payment of 1st Installment 2,80,000
Interest @5% for 6 months [280000*5%*6/12] 0n 31/12/2016 7,000
Amt due before payment of 1st Installment 2,87,000
Payment of 1st Installment on 31/12/2016 [56000 +7000] 63,000
Amt due before payment of 2nd Installment 2,24,000
Interest @5% for 6 months [224000*5%*6/12] 0n 30/06/2017 5,600
 WN 2 Profit and Loss on sale of truck
Particulars Rs
Cash Price of 7 trucks [50000 Rs * 7 trucks] (1/07/2016) 3,50,000
Less: Depreciation 2016-2017 @20 % 70,000
Book value of 7 Trucks on [30/06/2017] 2,80,000

Book value of 3 trucks = 280000*3/7=120000Rs

Profit/Loss on sale of trucks
Book value of 3 Trucks – Agreed value of repossession of 3 trucks
: 120000-40500=79500 Rs [Loss on surrender]
Book value of 4 trucks=280000*4/7=160000Rs
In The books of Basil Ltd
Truck A/c
Date Particulars Rs Date Particulars Rs
01/07/2016 To vendor A/c[50000 3,50,000 30/06/2017 By Depreciation A/c 70,000
*7 trucks]
30/06/2017 By Vendor A/c 40,500
30/06/2017 By P& L A/c 79,500
30/06/2017 By B/s C/d 1,60,000
Total 3,50,000 Total 3,50,000
Vendor A/c
Date Particulars Rs Date Particulars Rs
1/07/2016 To cash / Bank A/c [down 70,000 01/07/2016 By Trucks A/c 3,50,000
payment]
31/12/2016 To cash/ Bank A/c[1st 63,000 31/12/2016 By Interest A/c 7,000
installment]
30/06/2017 To Trucks 40,500 30/06/2017 By Interest A/c 5,600
30/06/2017 To balance C/d 1,89,100
Total 362600 Total 362600

In the books of Vendor

Brahma ltd A/c
Date Particulars Rs Date Particulars Rs
1/07/2016 To H.P sales A/c 350000 01/07/2016 By cash A/c 70000
31/12/2016 To Interest A/c 7000 31/12/2016 By cash A/c 63000
30/06/2017 To Interest A/c 5600 30/06/2017 By Goods Repossessed 40500
30/06/2017 By Balance C/d 189100
Total 362600 Total 362600
GOODS REPOSSESSED A/C
Date Particulars Rs Date Particulars Rs
30/06/2017 To Vendor A/c 40500 30/06/2017 By Bank A/c 40000
30/06/2017 To cash/bank [improvement exp] 1000 30/06/2017 By P & L A/c 1500

Total 41500 Total 41500