Hire Purchase

Conceptual Framework
Hire Purchase is a mode of financing the price
of the goods to be sold on a future date.
The goods are let on hire, the purchase price
is to be paid in instalments and the hirer is
allowed an option to purchase the goods by
paying all the instalments.

Terms used in Hire Purchase Agreements

Hire purchaser: A hire purchaser is a person who possesses the
goods under hire purchase agreement for use within an option to
either purchase it or return after use.
Hire vendor: a hire vendor is a person who sells the goods under
hire purchase agreement.
Cash price: it is the price of goods which is sold under contract of
sale
Hire purchase price: it is the price at which the goods are sold
under hire purchase system it includes cash price of the goods and
interest.
Instalment money: it is the part of the hire purchase price paid by
hire purchaser, in periodic intervals.
Down payment: it is the initial payment made by the hire
purchaser to the hire vendor at the time of entering into hire
purchase agreement.

Hire charges: it is an amount refers to the difference between
hire purchase price and cash price (H P- C P= H C) it also
referred to as interest.
Statutory hire charges: it is a hire charges according to the
hire purchase act of, 1972.
Hire purchase agreement: it is an agreement between hire
purchaser and hire vendor according to section 2(c) of the
hire purchase act 1972, for purchasing of goods according to
agreement.
Termination of hire purchase agreement: The hirer can
terminate the agreement at any time by giving the 14 days
notice to the owner. However what ever the amount is
already paid by the hirer is considered as a hire charges.


Features Hire Purchase
Payment to be made in installments over a specified
period.
The possession is delivered to the hirer at the time of
entering into the contract.
The property in the goods passes to the hirer on
payment of the last installment.
Each installment is treated as hire charges so that if
default is made in payment of any installment, the
seller becomes entitled to take away the goods.
The hirer/purchaser is free to return the goods
without being required to pay any further
installments falling due after the return.
The finance (hire purchase) company
purchases the equipment from the equipment
supplier and lets it on hire to the hirer to use
it, who is reqired to make a down payment of
say 20-25 per cent of the cost and pay balance
with interest in Equated Monthly instalments.
The interest component of each hire purchase
instalment is computed on the basis of a flat
rate of interest on a declining balance method
method.
Difference Between Sale and Hire Purchase
Although hire purchase system could ultimately result in sale of goods, the sale in normal sense
and sale under hire purchase system are not the same. The following are the differences between
sale and hire purchase.

Sale
A sale is governed by the sale of Goods Act,
1930.
In case of sale, the ownership of the goods is
transferred to the buyer immediately.
In case of sale, the buyer makes payment in
lump sum.
The buyer pays only for the price of goods.
On non-payment of the consideration the
seller cannot take back the goods, but can
only take legal action on buyer.
Once a sale has taken place, neither the seller,
nor the buyer can terminate the contract
(unless it is for genuine reason like damage of
goods etc.)
When the buyer becomes insolvent, the seller
has to undertake the risk of loss.
A sale is subject to levy of sales tax at the
time of contract of sale.






Hire Purchase
Hire purchase is governed by the Hire
Purchase Act, 1972.
In case of Hire purchase, the ownership of
goods is transferred to buyer on payment of
all installments.
In case of hire purchase, the payment is made
in installments.
The hire purchaser pays for the price of goods
and also some amount of interest.
On non-payment of any installment, the seller
can re-possess the goods.
Either the buyer or the seller can terminate
the contract at any point of time, until the
payments of last installment.
When the hire purchaser becomes insolvent,
the seller can reposes the goods, and hence
need not undertake the risk of loss.
In this case, the sales tax will be leviable at
the time of ownership (i.e. on payment of last
installment).

Hire Purchase Vs Instalment
In Instalment sale, the contract of sale is
entered into, the goods are delivered and the
ownership is transferred to the buyer, but the
price of the goods is paid in specified
instalments over a definite period.

Hire purchase vs leasing
Hire purchase

The hirer has the option
to purchase the goods
Is a method of financing business
assets & consumer articles
Depreciation & investment
allowance can be claimed
Only the interest is tax component
deductible
Hirer enjoys the salvage value
of the asset


Leasing

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
Entire lease rental is tax deductible
Lessee does not enjoy the salvage
value of the asset



In hire purchase, there is a call option to
purchase the goods and the hirer has the right
to terminate the agreement at any time
before the payment of the last instalment.
Whereas in Instalment sale, the ownership is
transferred simultaneously with the payment
of the first/ initial instalment.
Procedure of Hire Purchase

The Dealer, contracts with finance co. for financing his hire
purchase deals.
The customer selects the goods for HP, and dealer arranges
for the complete set of documents.
Dealer sends documents to finance co. with request to
purchase the goods, and accept the HP transaction.
The finance co. signs the agreement and sends copy along
with EMI details to dealer.
Down payment by customer on completion of proposal form.
Dealer delivers the goods to the customer, property passes on
to the finance co..
Hirer pays EMIs, and on last payment , the ownership passes
on to him, with loan completion certificate by the finance co
Taxation
Though the hire, purchaser is not the owner of
the asset, he is entitled to claim depreciation
as a deduction, on the entire purchase price.
The consideration for hire received by the hire
vendor, is liable to tax, under the head profits
and gains of business and profession. The hire
income from house property is generally taxed
as income from House property.
The tax treatment given to hire purchase is
exactly the opposite of that given to lease
financing.


Accounting
In the books of the Purchaser
The purchase price is capitalized and the cash
purchase less down payment is booked as a
laibility.
Depreciation is booked on the Asset
The charge is divided into a Finance charge
and a capital recovery charge.
In the books of the Hire Vendor
The instalments receivables is recorded as a current asset.
The finance income component is recorded as a current
liability under the head Unmatched Finance Charges.
The instalment received reduces the value of the current
asset.
Its interest component is recorded as Hire Finance Income.
The capital recovery component goes towards reducing the
current liability - Unmatched Finance Charges.