Meanin HIRE PURCHASE SYSTEM

Hire purchase system means when goods are sold at credit for which payment is made by the
purchase in installment over a period of time known as hire purchase system.
It is a system where the sale of goods deliveries the goods to the buyers without transferring
of ownership of goods the payment of installment calculated and after the payment of last
installment the ownership will be transferred to the bias if the bias is unable to paid by
buyers will be treated as his charges.
It is system under which purchase the goods on credit and agreed to pay the value of assets in
Ascertain installment with particular rate of interest and he is only eligible to ownership after
payment of last installment.
DEFINITION

According to section 2[ c ]of the hire purchase act 1972 hire purchase is an agreement where
in the goods are let on hire and under which has an option to purchase them in according
accordance with the terms of the agreement and includes an agreement under which
1] Position of goods is delivered by the owner there of a person at a condition that such
person pays the agreed amount in periodical installments.
2] The property in the goods is to pass two such person on the payment of the last of such
instruments.
3] Search person has a right to terminate the agreement at any time before the property so
passes.
FEATURS OF HIRE PURCHASE SYSTEM

1] It is an agreement between two parties namely hire purchase and hire

vendor 2] The payment of Bill made by the hire purchase in certain
installments.
3] After payment of last installment only the ownership of goods transfer from hire vendor
to purchaser.
4] If the higher purchase there unable to pay the installment the legal ownership of goods not
transferred to the purchaser.
5] The hire purchase should be paid in installments along with interest.

6] The hire purchase system governed by the hire purchase act at1972.

7] The hire vendor has option to retain the goods before last installment paid.
8] Theamounttowordscashprizeisretainedascapitalexpenditureandtowards
interest is retained with revenue expenditure.
DIFFERENCE S BETWEEN HIRE PURCHASE SYSTEM AND SALE

HIRE PURCHASE SYSTEM SALES

1] It is a system of purchase governed by the
hire purchase act of 1972
2] Under this is from the legal ownership of
goods is not trader to purchase immediately
3] The payment made in installment
4] The ownership of goods transfer to
purchase our after payment of last installment
only
5] The hire purchase should we pay per
installment along with interest
6] The sailor can take back the goods in case
of nonpayment of installment
7] Under the system sales tax level at the time 7] Sales taxes lived at the time of sale of
of transfer of ownership.
8] Buyer not able to enjoy the ownership of
goods still last payment of installment
1] It is a act governed by sale of goods act of
1930
2] Under this system the legal ownership of
goods transferred to purchase immediately
3] Generally the payments made in cash
4] The legal ownership of goods transferred
to purchase there after payment of sales price
5] Face book only cash price of goods
6] Under the system the seller cannot taken
back the goods
goods and services
8] Under the system the buyers can able to
enjoy the ownership of goods after purchase

DIFFERENCE S BETWEEN HIRE PURCHASE SYSTEM AND INSTALLMENT SYSTEEM

HIRE PURCHASE INSTALLMENT

PURCHASE
1] Hire purchase is an agreement of hiring 1] Installment purchases is agreement of
sales
2] Ownership is transferred to the purchaser on 2] Under Installment, the ownership is
payment of all installment money. transferred on signing of the agreement.
3] Purchaser is similar to bailee. 3] In Installment, purchaser is not be in the
place of a bailee.
4] The risk has to bear by vendor. 4] The risk has to bear by purchaser.
5] The vendor has right to repossess the asset 5 Installment vendor has no such right, as it
sold, in default of making payment. is outright credit sale.
6] The purchaser has no right to sublet or sale 6] The Installment purchaser has right to
of asset until the payment of all installment sale or sub-let the asset purchased as he has
money. ownership right.
7] The purchaser can exercise the right to 7] Goods once sold cannot be taken back or
return the asset. returned.
HIRE PURCHASOR:-

The person who purchased the goods from higher vendor under fire system.

Purchase goods from higher vendor who hired the option of purchasing for hiring the goods
and hire purchase system called hire purchaser.

HIRE VENDOR:-

The person who sells the goods to hire purchase under hire purchase system.

He is a person who receives the installment amount for sales the goods on hire purchase
system.

CASH PRICE:-

It refers to price payable at the time of purchase is a price value payable who receives by
the hire vendor at the time of purchase.

HIRE PURCHASE PRICE: [price + installment interest]

It refers to the price at which goods are sold under hire purchase system the price includes
the price of goods and percentage of interest.

INSTALMENTS PRICE:

It is a payment or part of payment payable by the hire purchase the hire vendor in periodic
interest.

DOWN PAYMENT:

It is a payment or interest payable by the hire purchase to the higher vendor as advance at
the time of making hire purchase agreement. Image advance payment payable by the
purchaser to the vendor at the time of purchase.

NET CASH PRICE:

It is a different amount between cash price and down payment

NET CASH PRICE = CASH PRICE - DOWN PAYMENT

NET HIRE PURCHASEPRICE:

It refers to the price of the goods after arrival of deducting of delivery charges registration
charges and insurance charges.
HIRE PURCHASE CHARGES

It refers to differences between net hire purchase price and net cash price as the goods in
short it is the amount of interest charges.

STATUTORY HIRE PURCHASE CHARGES

The hire purchase act of 1972 registration the maximum amount of interest to be 30% of cash
installment. the hire purchase charges can be calculated by the using formula

Statutory Charges=CI X R X I\100

CI=CASH PRICE INSTALLMENT

R=RATE OF INTEREST

I=TIME GAP BETWEEN TWO INSTALLMENTS

METHODS OF ACCOUNTING TREATMENT

1. Asset Accrual Method

2. Out Right Property Method \ Credit purchase with interest method.

1. ASSET ACCRUAL METHOD: under this method the asset is deemed to be acquired
gradually on the basis of cash prize paid hence the asset is recorded at the cash price actually
paid under this method asset account is debited only to the except of cash prize in each
installment .
2. OUT RIGHT PROPERTY METHOD: under this method as it is deemed to be required
as soon as if is received into possession and the asset is recorded at full cash prizes it is also
called as credit purchase with interest method.
 Journal entries in the books of the Hire Vendor under Asset Accrual Method.
DATE PARTICULARS L/F DEBIT CREDIT
1. For assets sold under hire purchase system XX

Hire purchase Account. Dr XX

To sales Account

2. For down payment received

Cash /bank Account Dr XX

To hire vendor Account XX

3. For interest due

Hire purchase Account Dr XX
To Interest Account XX

4. For installment Received

Cash /bank Account Dr XX

To Hire purchase Account XX

4. For I year Depreciation charged

Depreciation Account Dr XX
To Asset Account XX

5. For interest Account closed by transfer to P &L Account

Interest Account Dr XX
To Profit and Loss Account XX
 Journal entries in the books of the Hire purchaser under Asset Accrual Method.
DATE PARTICULARS L/F DEBIT CREDIT
1. For Asset purchased on hire purchase system XX
No Entry

2. For down payment made

Asset A/c Dr XX
To cash/bank Account XX

3. For first installment due

Asset A/c [cash price ] Dr XX
Interest Account Dr XX
To hire vendor Account XX

4. For depreciation charges

Hire vendor Account Dr XX
To cash / Bank Account XX

5. For depreciation charged

Depreciation Account Dr XX
To Asset Account XX

6. For interest and depreciation transferred to P and L A/c

Profit and Loss Account Dr XX
To Interest Account XX
To depreciation Account XX