HIRE PURCHASE

Prepared By:

Jigar Dhuvad
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Hire Purchase
Hire purchase is used to buy expensive items which a person cannot afford to pay outright: e.g. a car A down payment is usually paid and the balance is paid over several months (monthly instalments).

DEFINITION    Goods are let out on finance by a finance company to the hire purchaser customer Buyer is required to pay an equal amount of periodic installments during a given period Ownership transfers at the payment of the last installment .

Hire purchase .definition • 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. .

Ownership is transferred after all the instalments have been paid. 7/21/11 .What is hire purchase ? Here possession of goods is transferred immediately. but payment is made in instalments.

terminate the agreement in case of default of purchaser hire purchase price is higher than cash price. The seller can however.Terms of hire purchase In hire purchase the purchase has to follow the agreement and he cannot terminate the contract. because interest element is added in this price 7/21/11 .

20000 and 3 annual instalments of 20000 each. balance : 19086 interst (belancing amt) : 914 last instalment 20000 balance = nil 7/21/11 . show the accounting ? Rate of interest 5% 74500 – 20000 = 54500 interest = 2725 amount due : 57225 2nd instalement 20000 amount due : 37225 interest = 1861 due = 39086 3rd instalment : 20000.A purchases a machine for down payment of Rs. Cash price is 74500.

Dealer sends documents to finance co. Dealer delivers the goods to the customer. contracts with finance co. with request to purchase the goods. . Hirer pays EMIs. with loan completion certificate by the finance co. property passes on to the finance co. for financing his hire purchase deals. the ownership passes on to him. and dealer arranges for the complete set of documents. and accept the HP transaction.. The finance co.Process of Hire Purchase        The Dealer. signs the agreement and sends copy along with EMI details to dealer. The customer selects the goods for HP. Down payment by customer on completion of proposal form. and on last payment .

Hire purchase vs leasing • The hire has the option to purchase the goods • Is a method of financing business assets & consumer articles • Depreciation & investment allowance can be claimed • • In leasing the lessee has no option to buy the goods • Is a method of financing business assets only • • Depreciation & investment allowance cannot be claimed • Only the interest is tax • Entire lease rental is tax component deductible deductible • Hirer enjoys the salvage value of • Lessee does not enjoy the the asset salvage value of the asset • • .

• 20-25% deposit is required in hire purchase • In hire purchase we purchase the goods • The extent of finance is not 100% because of down payment • Hirer bears the cost of maintenance • • Asset is shown in b/s of the hirer • • • No deposit is required in leasing • In leasing we rent the goods • The extent of finance is 100% as no down payment required • Maintenance cost is borne by the lessor except in finance lease • Leased assets are shown by way of foot note only • .

Hire purchase .

LEASING IN INDIA Present industry order Only few major players exist ü SREI International Finance üSundaram Finance ü üCholamandalam Finance ü üMahindra & Mahindra üGE Capital üShriram Finance ü üTata Finance ü üCountrywide Finance üCiticorp .

including software packages -Office equipment .Business cars .Medical and dental equipment . .Computers.Agricultural equipment.Plant and machinery .. including: .Hotel equipment .Commercial vehicles .Many kinds of business asset are suitable for financing using hire purchase or leasing.

e. For the present.merchant banking etc. a company in which it holds not less than 51% of the shares ) for the business of equipment . . Banks which have set up subsidiaries (i.e. GUIDELINES FOR BANKS AS FAR AS HIRE PURCHASE BUSINESS IS CONCERNED directly (i. banks shall not themselves undertake II. leasing . may undertake the hire purchase business either through such a subsidiary or through a separate subsidiary. departmentally) the business of hire purchase I.

Main supplier of consumer credit are Multinational Banks.etc . washing machines etc. personal computers. Finance cos. (eg. TVs. Cars. scooters. commercial banks.Consumer Credit   Includes all asset based financing plans offered to individuals. Refrigerators.VCRs.)...

Most tripartite consumer credit transactions are of this type. Salient Features     Parties to the transaction : Bipartite arrangement . The dealer arranges the credit from the financier. . and customer. Conditional Sale .. Credit Sale .dealer. Hire Purchase ..Consumer Credit. Customer option to purchase the asset on completion of the pay back period. Tripartite Transaction . Structure of the transaction : Hire-Purchase .two parties viz borrower/consumer and dealer/financier. financier.

     Conditional Sale : Ownership not transferred until full payment of purchase price. the EMI for different payment periods is mentioned. including the credit charge.Consumer Credit .generally flat rate. But the agreement cannot be cancelled.. .. Sometimes in place of ROI.12 -60 months. Payment Period and ROI : Payment period . ROI . The customer cannot terminate the agreement. Credit Sale : Ownership transferred to the customer on first instalment payment. Effective Rates generally not disclosed.

Evaluation Can be made with Effective Rate of Interest and rebates for early repayments. ...     Security : First charge on assets.Consumer Credit . The consumer cannot sell the hypothecated asset.

What entry is made on purchase of an asset on hire purchase ? Asset on hire purchase debit to hire purchase vendor a/c credit (with the cash price of assets) 7/21/11 .

What entry is made on payment of an asset purchased on hire purchase ? Hire vendor ac debit to bank 7/21/11 .

What entry is made on payment of an asset purchased on hire purchase ? Interest on hire purchase debit to hire vendor a/c credit 7/21/11 .

What entry is made about depreciation of an asset purchased on hire purchase ? Depreciation on asset a/c debit to asset account credit SECOND ENTRY p & l a/c debit to depreciation credit 7/21/11 .

What entry is made in the books of vendor on hire purchase sale ? Hire purchaser a/cdebit to hire purchase sale a/c credit (with the cash price of goods) WHEN PAYMENT IS RECEIVED bank a /c debit to hire purchaser a/c credit FOR INTEREST hire purchaser debit to interest on hire purchase sale a/c credit 7/21/11 .

There are two types of repossession : 1. full repossession 2.What is repossession ? If hire purchaser doesnt pay instalments. partial repossession 7/21/11 . the vendor will take repossession of the assets.

What is the entry in the books of purchaser on full repossession ? Hire ventor a/c debit to asset a/c (from the value of asset as per accounts) 7/21/11 .

What is the entry in the books of vendor on full repossession ? Goods repossession a/c debit to hire purchaser account credit (a new account of goods repossession will be opened) 7/21/11 .

the hire purchaser will close the account of ventor and vendor will close the account of purchaser. But in case of partial repossession.What is the accounting entry in the case of partial repossession ? In the case of full repossession. the accouts will remain open and the account will show balance for remaining assets 7/21/11 .

THANK YOU 7/21/11 .

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