Hire Purchase Accounting &

Instalment Purchase System

Chapter 6
Content
• Meaning, Features, Terms used un case of Hire Purchase System
• Methods of Interest Calculation
• Accounting for Hire Purchase System in the books of hire purchaser
and Hire Vendor (Asset Accrual Method) (Theory & Problem)
• Instalment Purchase System (Theory)
Introduction
In the modern age of science and technology several methods
are used to sell goods, products or services. The most
important methods of sale are:
1. Sale of goods in cash/credit.
2. Sale through instalment payment method, and
3. Hire Purchase System
Introduction
• The Hire Purchase System is a method of selling goods by following a
midway between Cash Sales System and Credit Sale System.
• Cash Sales System : Goods are sold and delivered to the purchaser or
buyer only when the payment is made immediately.
• Credit Sale System : The goods are sold and delivered immediately
but the price is paid by the purchaser or buyer on some future date
mostly without interest upto a certain time limit called Credit Period.
• As against these two popular systems of selling goods under HIRE
PURCHASE SYSTEM, the goods are delivered immediately but the
price is recovered or collected in future in easy instalments with
regular intervals.
Meaning of Hire Purchase

Hire Purchase is an agreement by which Assets/goods are

purchased/sold at the following terms:
i. That Payment will be made in Instalments.
ii. Each instalment will be treated as Hire Charges (Rent) so that if
default is made even in the payment of last instalment seller will
take back (Repossess) goods without compensating the buyer.
iii. If all the instalments will be duly paid, then the ownership will be
transferred to the buyer (by receiving NOC).
Legal Position
• The Hire Purchase System is regulated by Hire Purchase Act, 1972.
• According to the Hire Purchase Act 1972-Section 2(c) “Hire purchase
Agreement means an agreement under which goods are let on hire and
under which the hire 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 thereof to a person on
condition that such person pays the agreed amount in periodical
instalments,
ii. The property of the goods is to pass on to such person on the payment
of the last of such instalment, and
iii. Such person has a right to terminate the Agreement at anytime before
the property so passes.”
Termination of Hire Purchase Agreement
• The hire purchaser, at any time can terminate the agreement by
giving 14 days notice in writing to the hire vendor.
• The hire purchaser has to redeliver the goods of the hire vendor.
• On the other hand, Hire vendor will have the right to retain the
installment (hire charges) already paid by the hire purchaser.
• The hire vendor has a right to recover the arrears of hire charges due
and he will also have right to repossess the goods.
Features of Hire Purchase System
On the basis of general meaning and legal provisions, the main features
of hire purchase system are:
• Agreement in Writing: There is specific agreement in writing and
signed by the parties to the agreement, that is, hire vendor and hire
purchaser.
• Possession of goods: The possession of goods is given immediately to
the hirer (called the hire purchaser) on signing the hire purchase
agreement. In other words, the hirer gets the right to use the goods
on getting the possession.
• Payment in Installments: The hire purchaser would make the
payment of the agreed hire purchase price in monthly, quarterly, half
yearly or even yearly instalments according to the agreement for the
fixed period of time.
• Ownership of the goods: The hirer or hire purchaser would become
owner of the goods only on the payment of last instalment and not
before that.
• Right to terminate the agreement: The hirer or hire purchaser has
the right to terminate the hire purchase agreement any time before
he becomes owner of the goods.
• To keep the goods in good condition
• Loss to goods: Any loss occurring to the goods without any fault of
the hire purchaser, would be borne by the hire vendor. It is based on
simple rule that risk is with the ownership.
• No sale or pledge of goods: The hire purchaser cannot sell or pledge
the goods until he becomes the owner after paying the last
installment.
• Right to repossess from third party: In case the hire purchaser sells
the goods to third party before becoming the owner, the goods can be
taken back (repossessed) from third party.
• No refund: The sum or money paid by the hire purchaser, prior to
repossession of the goods by the hire vendor, are treated as ‘ Hire
Charges’ for using the goods or property and the same are never
refundable if the hire purchaser does not want to continue the hire
purchase agreement.
 Technical Terms used in case of Hire Purchase System
• Hirer or Hire Purchaser: Means the person who obtains or has obtained
possession of goods from the owner under a hire purchase agreement.
• Owner: Means a person who delivers or has delivered possession of
goods to a hirer under a hire purchase agreement also called the hire
vendor.
• Hire Purchase Agreement: It is an agreement of hiring.
• Deposit or Down Payment or Option Amount: It is an initial payment
(lump-sum out of the total Hire purchase price, payable to the vendor in
advance) made by the hirer (hire purchaser) at the time of signing hire
purchase agreement and taking possession of goods. It does not carry
any interest on it.
• Hire Purchase Price: It is the sum payable periodically by the hirer to
the hire vendor under a hire purchase agreement. This price includes
Total Cash Price + Interest Component OR Down Payment + Sum of all
Instalments.
• Interest: Hire purchase charges are popularly known as interest.
Interest is the amount which is payable in addition to the actual cash
price of the goods. It is the amount paid by the buyer for the delayed
and postponed payment. This is the difference between Hire Purchase
Price and Cash Price.
• Cash Price: Means the total amount as price payable at the time of
purchase. It is composed of cost to the owner Plus profit margin. Or It
is the selling price of the article to be sold. It does not include interest
i.e., Hire Purchase Price – Interest. The cash price is the price of the
goods which can be purchased by cash or the retail price, if not
purchased under hire purchase system.
• Net Cash Price: Means the cash price of the goods comprised in the
hire purchase agreement Less any deposit or down payment.
 Hire Purchase System Vs Instalment System
Point of Difference Hire Purchase System Instalment System
1. Nature of Contract It is like Contract of Hire, though It is an agreement of Sale right at
later on it becomes Contract of the beginning only.
Sale.
2. Transfer of Ownership Ownership remained with the Ownership passes to the buyer at
seller until buy or pays all the the time of contract.
instalments.
3. Return of Goods Buyer can return the goods at Buyer cannot return the goods to
anytime and will not be liable to the seller.
pay further instalments.
4. Treatment at the time of default In the case of default seller can Seller cannot repossess the goods,
repossess the goods without the seller has to sue the buyer for
compensating the buyer. the amount in court.
5. Right to Resale/Sale Buyer cannot sell the asset because Buyer can sell the asset even
he is not the owner of the asset. before making fuel payment to the
seller.
6. Risk Risk remains with the seller Risk is that of buyer since he is the
because he is the owner. owner.
 Rebate in Hire Purchase
• Rebate: The hirer can claim rebate from the owner or hire vendor in
case he decides remit the balance of the purchase price in lump sum
without continuing the hire purchase agreement till the last date
stipulated.
• Hire purchaser can terminate agreement before its end.
• Termination must be mutually agreed between the vendor &
purchaser.
• The outstanding amount must be settled in lumpsum.
• Settlement amount = Total amount outstanding – Rebate
2 𝐻𝑖𝑟𝑒 𝐶ℎ𝑎𝑟𝑔𝑒𝑠 ∗𝑁𝑜.𝑜𝑓 𝐼𝑛𝑠𝑡𝑎𝑙𝑚𝑒𝑛𝑡 𝐷𝑢𝑒
• Rebate = 𝑋
3 𝑇𝑜𝑡𝑎𝑙 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐼𝑛𝑠𝑡𝑎𝑙𝑚𝑒𝑛𝑡𝑠
• Hire Charges = Hire Purchase Price – Cash Price
Problem
• The cash price of a good is Rs. 24,000. The total hire purchase price is
Rs. 30,000. The agreed number of instalments is 30. After paying 12
instalments, the purchaser would like to pay the amount in lumpsum.
Calculate the total amount payable.
Solution
Cash Price of the good: Rs. 24,000
Hire Purchase Price: Rs. 30,000
Hire Charges =HPP – CP
= Rs. 30,000 – Rs. 24,000
= Rs. 6,000
HPP 30,000
Amount per part = = = Rs. 1,000
No. of part payments 30
Settlement Amount = Amount Outstanding – Rebate
𝟐 𝑯𝒊𝒓𝒆 𝑪𝒉𝒂𝒓𝒈𝒆𝒔 ∗𝑵𝒐.𝒐𝒇 𝑰𝒏𝒔𝒕𝒂𝒍𝒎𝒆𝒏𝒕 𝑫𝒖𝒆
Rebate = 𝑿
𝟑 𝑻𝒐𝒕𝒂𝒍 𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑰𝒏𝒔𝒕𝒂𝒍𝒎𝒆𝒏𝒕𝒔
2 6,000∗18
Rebate = 𝑋 = Rs. 2,400
3 30
Settlement Amount = Amount Outstanding – Rebate = (18 * Rs. 1000) – Rs. 2,400
= Rs.18,000 – Rs. 2,400 = Rs. 15,600
Problem
• The cash price of a good is Rs. 48,000. The hire purchase price is Rs.
52,000. The total number of installments is 20. The number of
instalment paid is 14. Calculate the amount payable by the purchaser
if he wishes to settle the balance amount in lump sum.
Solution
Cash Price of the good: Rs. 48,000
Hire Purchase Price: Rs. 52,000
Hire Charges =HPP – CP
= Rs. 52,000 – Rs. 48,000
= Rs. 4,000
HPP 52,000
Amount per part = = = Rs. 2,600
No. of part payments 20
Settlement Amount = Amount Outstanding – Rebate
𝟐 𝑯𝒊𝒓𝒆 𝑪𝒉𝒂𝒓𝒈𝒆𝒔 ∗𝑵𝒐.𝒐𝒇 𝑰𝒏𝒔𝒕𝒂𝒍𝒎𝒆𝒏𝒕 𝑫𝒖𝒆
Rebate = 𝑿
𝟑 𝑻𝒐𝒕𝒂𝒍 𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑰𝒏𝒔𝒕𝒂𝒍𝒎𝒆𝒏𝒕𝒔
2 4,000∗6
Rebate = 𝑋 = Rs. 800
3 20
Settlement Amount = Amount Outstanding – Rebate = (6 * Rs. 2,600) – Rs. 800
= Rs.15,600 – Rs. 800 = Rs. 14,800
 Recording of Transactions
• Before recording the transactions in Hire purchase system, one has to
be clear regarding the calculation of interest, hire purchase price and
cash price of the Hire purchase Agreement.
• Interest calculation are common for both the methods, which has to
be calculated before passing journal entries.
 Hire Purchase Price
• Hire purchase price = Cash price + Interest
• Cash price = Hire purchase price – Interest
• Interest = Hire purchase price – Cash price
• Cash price = Cost price + Profit
Therefore, Hire purchase price = Cost price + Profit + Interest.
• To solve the problems, one should make sure that all the three
information are available i.e., cash price, interest and hire purchase
price.
Calculation of Interest
• Hire Purchase Price includes both Cash Price and Interest. Therefore,
calculation of interest component is very important.
• In case Interest is included in the instalment, interest can be found by
this formula:
𝑅𝑎𝑡𝑒 𝑜𝑓 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
=
100+𝑅𝑎𝑡𝑒 𝑜𝑓 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
A. Calculation of Interest when HPP and Rate of
Interest given but Cash Price is not given
OR
When Cash Price and Interest are not given
Problem 1
• Mr. Robert purchased a motorcycle on hire purchase system on
1.4.2008. As per the agreement he has to pay Rs.3,600 down and
Rs.5,100 at the end of the first year, Rs. 4,800 at the end of second
year and Rs.16,500 at the end of the third and final year. Interest is
charge @ 10%p.a. You are required to calculate Interest and the total
cash price.
Solution (Backward or Reverse Table)
Particulars Instalment (Rs.) Interest Principal or Cash Price Retail
III Instal. 16,500 10 16,500 – 1500 = 15,000
16,500 X = 1500
110

II Instal. 4,800 10 4,800 – 1,800 = 3,000

(4,800 + 15,000) X = 1,800
110

I Instal. 5,100 10 3,000

(5,100 + 15,000 + 3,000) X = 2,100
110

Down 3,600 - 3,600

Payment
Total 30,000 5,400 24,600
Problem 2
• Down payment is 20% and Balance amount is paid in 4 instalments of
Rs. 2,80,000, Rs. 2,60,000, Rs. 2,40,000 and Rs. 2,20,000. Rate of
Interest is 10%. Compute Cash Price.
Problem 3
Akash purchased a smartphone on hire purchase system from Tech.
Ltd. On 1.1.2016 with an agreement to pay Rs. 2500 on signing the
contract and the balance in three instalments:
Rs. 3,250 at the end of the 1st Year
Rs. 3,000 at the end of the 2nd Year
Rs. 2,750 at the end of 3rd Year
Interest is charged at the rate of 10%. Calculate Cash Price.
 Solution:

Type Instalment (Rs.) Interest Principal or Cash Price Retail

III Instal. 2,750 10 2,500

2,750 X 110 = 250
II Instal. 3,000 10 2,500
(2,500 + 3,000) X 110 = 500
I Instal. 3,250 10 2,500
(2,500 + 2,500 + 3,250)X 110 = 750
Down Payment 25,00 - 2,500
Total 11,500 1,500 10,000
Problem 4
X purchased a radiogram on hire purchase system. According to the
agreement, he is required to pay Rs. 800, Rs. 400 at the end of the first
year, Rs. 300 at the end of second year and 700 at the end of third year.
Interest is charged at 5% p.a. You are required to calculate total cash
price of the radiogram and interest paid with each installment.
 Solution:

Year Instalment (Rs.) Interest Principal or Cash Price Retail

31.03.08 700 5 667
700 X 105 = 33
31.03.07 300 5 254
(667 + 300) X 105 = 46
31.03.06 400 5 337
(667 +254 + 400) X105 = 63
1.04.05 800 (Down Payment) - 800
Total 800 142 2058
Problem 5

Mr. Nair purchased a VCR on hire purchase system on April 1, 2005. As

per the terms, he is required to pay Rs. 8,000 down (i.e., on April 1,
2005), Rs. 8,000 on March 31st 2006, Rs. 7,000 on March 31st 2007 and
Rs. 6,000 on March 31st 2008. Interest is charged at 20%. You are
required to calculate the total cash price of the VCR and interest paid
with each instalment.
 Solution:

Year Instalment (Rs.) Interest Principal or Cash Price Retail

31.03.08 6,000 20 5,000
6,000 X 120 = 1,000
31.03.07 7,000 20 5,000
(7000 + 5,000) X 120 = 2,000
31.03.06 8,000 20 5,000
(5,000 + 5,000 + 8000)X120 = 3,000
1.04.05 8,000 (Down Payment) - 8,000
Total 29,000 6,000 23,000
B. Cash Price and Rate of Interest are given
but Instalment includes Interest
Problem 1
• Cash Price = Rs. 37,500
• Down Payment = Rs. 5,000 & Balance is paid in 5 instalments of Rs.
7,500 each.
• Rate of Interest = 5%
Compute the amount of Interest.
Solution (Forward Table)
(a) (b) (c) =(b) X 5% (d) (e) =(d) –(c) (f) = (b) – (e)
Year Outstanding Balance Interest@5% HPP Cash Price or Outstanding
at Beginning (RS.) Principal Balance at the
End
1 Rs. 37,500 –Rs. 5,000 1625 7,500 5,875 26,625
= 32,500
2 26,625 1331 7,500 6,169 20,456
3 20,456 1023 7,500 6,477 13,979
4 13,979 699 7,500 6,801 7,178
5 7,178 322 (B.F) 7,500 7,178 Nil
Problem 2 (Given: HPP & Cash Price; But Rate of Interest NOT given)
Mr. Mano has purchased a motor cycle on hire purchase system. The
cash price is Rs. 52,000 which is sold for to 60,000 payable in four equal
Instalments annually of Rs. 15,000 each. The first Instalment is made at
the end of the first year. Calculate the Interest for each year.
Solution (Forward table)
Table Showing Calculation of Interest
Year Total Amount of Outstanding Interest Instalment Cash Price paid
Instalments Ratio = Total Interest X (HPP) = Instalment –
outstanding at the Outstanding Ratio (Given) Interest
time of payment of
each instalments
1 60,000 4 8,000 X 4/10 = 3,200 15,000 11,800
2 45,000 3 8,000 X 3/10 = 2,400 15,000 12,600
3 30,000 2 8,000 X 2/10 =1,600 15,000 13,400
4 15,000 1 8,000 X 1/10 =800 15,000 14,200
Total 10 8,000 60,000 52,000

Calculation of total interest

Total amount payable (15,000 X 4) 60,000
(-) Total Cash Price 52,000
Total Interest 8000
Total interest of Rs. 8,000 is to be divided on the outstanding Instalment ratio for the four years.
C. When Cash Price Instalments and Rate of
Interest is given
Problem 1

Calculate Interest and Hire Purchase Price from the following

information:
01.01.2010 Down Payment Rs. 8,000
31.12.2010 1st Instalment Rs. 5,000
31.12.2011 2nd Instalment Rs. 5,000
31.12.2012 3rd Instalment Rs. 5,000
31.12.2013 4th Instalment Rs. 5,000

Total Cash Price is Rs. 28,000 and Interest is charged @10% p.a.
Solution
Date Type Cash Price/Cost Interest Hire Purchase Price (HPP)
01.01.2010 Down Payment Rs. 8,000 NIL 8000
31.12.2010 1st Instalment Rs. 5,000 2000 7000
31.12.2011 2nd Instalment Rs. 5,000 1500 6500
31.12.2012 3rd Instalment Rs. 5,000 1000 6000
31.12.2013 4th Instalment Rs. 5,000 500 5500
Recording of Transactions: In the Books of
Hire Purchaser
• Assets Account
• Hire Vendor Account
• Interest Account
• Depreciation Account
• Profit & Loss Account
Assets Accrual Method: Accounting Entries in the Books of Purchaser

1. At the time of signing the agreement and after the delivery:

Asset A/c Dr. [Amount of Down Payment]

To Vendor’s A/c [Amount of Down Payment]

2. For making payment of the down payment:

Vendor’s A/c Dr. [Amount of Down Payment]

To Cash/Bank A/c [Amount of Down Payment]

Assets Accrual Method: Accounting Entries in the Books of Purchaser

3. At the end of the year or any other time when an instalment falls
due:
Asset A/c Dr. [Principal Amount or Cash Price in Instalment]

Interest A/c Dr. [Amount of Interest Due in Instalment ]

To Vendor’s A/c [Amount of the Instalment]

4. Then for payment of the instalment:

Vendor’s A/c Dr. [Amount of the Instalment]

To Cash/Bank A/c [Amount of the Instalment]

Assets Accrual Method: Accounting Entries in the Books of Purchaser

5. For charging Depreciation at the end of the year:

Depreciation A/c Dr. [Depreciation Amount]

To Asset A/c
6. At the end of the year for closing Depreciation A/c and Interest A/c:
Profit & Loss A/c Dr.
To Depreciation A/c
To Interest A/c
Note: Entries number 3, 4, 5 and 6 are to be repeated for 2nd year and
subsequent years till the last instalment in paid off.
Problem 1: Journal Entries
The cash price of the Machine bought by Hire Purchaser on 1/4/2016
under HP system was Rs. 7,45,000.
On signing the agreement Rs. 2,00,000 was to be paid & balance in
three instalments of Rs.2,00,000 each at the end of each year.
5% p.a. Interest was charged by Hire Vendor.
10% Depreciation is to be charged annually on reducing balance
method.
Solution (Forward Table)
(a) (b) (c) =(b) X 5% (d) (e) =(d) –(c) (f) = (b) – (e) Depreciation
Year Outstanding Balance Interest@5% HPP Cash Price Outstanding (Rs.)
(of Cash Price) at or Principal Balance (of
Beginning (Rs.) Cash Price) at
the End
1st April - - 2,00,000 2,00,000 - -
2016
31st March (Rs. 7,45,000 – 27,250 2,00,000 1,72,750 3,72,250 7,45,000 X
2017 Rs.2,00,000) 10/100 =
=5,45,000 74,500
31st March 3,72,250 18,612.5 2,00,000 1,81,387.5 1,90,862.5 6,70,500 X
2018 10/100 =
67,050
31st March 1,90,862.5 9,137.5 (B.F) 2,00,000 1,90,862.5 Nil 6,03,450 X
2019 10/100
=60,345
Total 55,000 8,00,000 7,45,000
Problem
Mr. Robert purchased a motorcycle on hire purchase system on
1.1.2018. As per agreement he has to pay Rs. 3,600 down and Rs. 5,100
at the end of the first year, Rs. 4,800 at the end of second year and Rs.
16,500 at the end of the third year. Interest is charged @10% p.a.
Depreciation @10% on WDV method. You are required to calculate
interest, principal and the total cash price. Prepare motorcycle account.