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Hire Purchase

Hire Purchase

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Published by Raisul Islam

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Published by: Raisul Islam on Apr 18, 2011
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Financial accounting (102)
Report on: Hire Purchase System
 
Prepared for:
Md. Golam Mortuza(Lecturer)
Submitted By
1. Sabrina Sultana Sanam (103-497-045)2. Faiza Nuzhat (103-481-045)3. Khadiza Aktar (103-541-045)4. Raisul Islam (103-417-045)5. Moshiur Rahman (103-397-045)6. Yassin Ahmmad (101-522-045)
PRIMEASIA UNIVERSITY
 
Date: 10.4.2011
 
Introduction:
 Now-a-days the books of accounts are maintained under double entry system by all bigbusiness houses and multinationals. You know that the sales are the Key factor of success of business. The profit of a business always depends on the volume of its sales. A big businesshouse can affect sales on cash basis as well as on credit basis. The credit sales are veryimportant and essential for the growth of business. The sale proceeds under such sales are notimmediately collected but are collected under certain arrangements such as Hire-purchasesystem or Installment payment system or collection after a certain period together with intereston outstanding balances. Hire-purchase system is the most secured and effective tool of collecting the proceeds of a credit sale.
Hire purchase
(abbreviated
HP
) is the legal term for a contract, in this persons usually agree topay for goods in parts or a percentage at a time. It was developed in the United Kingdom andcan now be found in China, Japan, Malaysia, India, Australia, and New Zealand. It is also calledclosed-end leasing. In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchasecontract allows the buyer to hire the goods for a monthly rent. When a sum equal to the originalfull price plus interest has been paid in equal installments, the buyer may then exercise anoption to buy the goods at a predetermined price (usually a nominal sum) or return the goods tothe owner. In Canada and the United States, a hire purchase is termed an
installment plan
;other analogous practices are described as closed-end leasing or rent to own.Hire purchase differs from a mortgage and similar forms of lien-secured credit in that the so-called buyer who has the use of the goods is not the legal owner during the term of the hire-purchase contract. If the buyer defaults in paying the installments, the owner may repossess thegoods, a vendor protection not available with unsecured-consumer-credit systems. HP isfrequently advantageous to consumers because it spreads the cost of expensive items over anextended time period. Business consumers may find the different balance sheet and taxationtreatment of hire-purchased goods beneficial to their taxable income. The need for HP isreduced when consumers have collateral or other forms of credit readily available.
Meaning and Concept of Hire-purchase system:
Hire-purchase system is a special system of purchase and sale of goods. Under this systempurchaser pays the price of the goods in installments. The installments may be annual, sixmonthly, quarterly, monthly fortnightly etc. Under this system the goods are delivered to thepurchaser at the time of agreement before the payment of installments but the title on the goodsis transferred after the payment of all installments as per the hire-purchase agreement. Thespecial feature of a hire-purchase transaction is that the payment of every installment is treatedas the payment of hire charges by the purchaser to the hire vendor till the payment of the lastinstallment. After the payment of the last installment, the amount of various installments paid isappropriated towards the payment of the price of the goods sold and the ownership or thegoods is transferred to the purchaser. Thus hire-purchase means a transaction where the goodsare sold by vendor to the purchaser under the following conditions:
 
The goods will be delivered to the purchaser at the time of 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 is being usedby the purchaser.
If all installments are paid as per the terms of agreement, the title of the goods istransferred by vendor to the purchaser.
If there is a default in the payment of any of the installments, the vendor will take awaythe goods from the possession of the purchaser without refunding him any amountreceived earlier in the form of various installments.
The contents of a hire-purchase agreement:
Hire-purchase agreement means a contract between the hire vendor and the hire purchaser regarding the sale of goods under certain conditions. Usually every hire-purchase agreementshall contain the following terms:
A clear description of the goods.
The cash price of the goods, cash price means the price at which goods may bepurchased against cash payment.
The hire-purchase price, hire purchase price means the total amount which is payableby the hire-purchase under the agreement.
The date on which the hire-purchase agreement will commence.
The description of the goods that will be delivered to the hire-purchase at thecommencement of the agreement.
The number of installments to be paid by the hire-purchase along with the amount of each installment and the date of payment of each installment.
The down payment if any, the down payment means the amount which is required to bepaid by hire-purchase to the hire vendor at the time of commencement of hire-purchaseagreement.
The rate interest charged by the hire vendor (optional).
A reasonably comprehensive statement of the parties' rights (sometimes including theright to cancel the agreement during a "cooling-off" period).
The right of the hirer to terminate the contract when he feels like doing so with a validreason.
The seller and the owner 
If the seller has the resources and the legal right to sell the goods on credit (which usuallydepends on a licensing system in most countries), the seller and the owner will be the sameperson. But most sellers prefer to receive a cash payment immediately. To achieve this, theseller transfers ownership of the goods to a Finance Company, usually at a discounted price,and it is this company that hires and sells the goods to the buyer. This introduction of a thirdparty complicates the transaction. Suppose that the seller makes false claims as to the qualityand reliability of the goods that induce the buyer to "buy". In a conventional contract of sale, theseller will be liable to the buyer if these representations prove false. But, in this instance, the

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