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After reading this ppt, you should be able to: Explain the meaning of hire purchase and instalment

t systems Explain the important definitions and terms used Describe the features of hire purchase and instalment systems Discuss the different accounting treatments Distinguish between hire purchase and instalment systems Calculate the interest Ascertain the profit and prepare various accounts.

Introduction Hire Purchase System Hire purchase v/s leasing Accounting Treatment for Hire Purchase System Default and Repossession

a transaction where goods are purchased and sold with the stipulation that payment will be made by instalments, each instalments will be treated a hire charge so that if default is made in the payment of even the last instalment, the seller will be entitled to take away the goods without compensation the hire purchase in any way and in case all instalments are paid, the goods will be treated as sold and property will pass to the purchaser.

Hire purchase system is a special system of purchase and sale. When goods are bought under the system. The purchaser pays the price in instalments which may be monthly, quarterly, six monthly, yearly or any other period. The buyer acquires the possession of the goods immediately on signing the hire purchase agreement but becomes its owner only on paying the last instalment.

There is no exclusive legislation dealing with hire purchase transaction in India. The Hire purchase Act was passed in 1972. An Amendment bill was introduced in 1989 to amend some of the provisions of the act. However, the act has been enforced so far.

a. Purchase is on credit. b. Purchase price is paid in instalments. c. Goods are delivered to the buyer. d. Buyer has a right to use these goods. e. Ownership in the goods remains with the seller till the payment to last instalments. f. Hire purchaser becomes the owner of the goods on payment of the last instalment.

g. It is the duty of the purchaser to keep the goods in good conditions till the payment of last instalment.

h. Hire purchaser has a right to terminate the agreement at any time.

i. If default is made in payment of instalment to the vendor, he can take possession of the goods subject to legal requirement.

Cash Price

Hire Purchase Price

Net Cash Price

Down Payment
Instalment System

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. Down payment by customer on completion of proposal form. 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. 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.

The hire 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

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

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

- Plant and machinery - Business cars - Commercial vehicles - Agricultural equipment.. - Hotel equipment - Medical and dental equipment - Computers, including software packages -Office equipment

Nature of Agreement Delivery of Equipment Location Inspection Repairs Alteration

Termination Risk Registration and fees Indemnity clause Stamp duty Schedule Schedule of hire charges.

SREI International Finance Shriram Finance Sundaram Finance Tata Finance Cholamandalam Finance Countrywide Finance Mahindra & Mahindra Citicorp GE Capital

For the present, banks shall not themselves undertake directly (i.e., departmentally) the business of hire purchase Banks which have set up subsidiaries (i.e., a company in which it holds not less than 51% of the shares ) for the business of equipment , leasing ,merchant banking etc, may undertake the hire purchase business either through such a subsidiary or through a separate subsidiary.

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

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

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

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

If hire purchaser doesnt pay installments, the vendor will take repossession of the assets. There are two types of repossession : 1. full repossession 2. partial repossession

In the case of full repossession, the hire purchaser will close the account of vendor and vendor will close the account of purchaser. But in case of partial repossession, the accounts will remain open and the account will show balance for remaining assets.

The taxation aspects of hire purchase transaction can be divided into three parts (a) Income Tax, (b) Sales Tax and (c) Interest Tax. Income Tax Aspect Hire purchase, as a financing alternative, offers tax benefits both to the hire-vendor (hire purchase finance company) and the hirer. are entitled to (i) The tax shield on depreciation calculated with reference to the cash purchase price and (ii) the tax shield on the finance charges.

Sales Tax Aspect The salient features of sales tax pertaining to hire purchase transactions after the Constitution (Forty Sixth Amendment) Act, 1982, are as discussed in following points: a. Hire purchase as Sale b. Delivery v/s Transfer of property c. Rate of tax

Interest Tax The hire purchase finance companies, like other credit / finance companies, have to pay interest tax under the Interest Tax Act, 1974. According to this Act, interest tax is payable on the total amount of interest earned less bad debts in the previous year at a rate of 2 percent. The tax is treated as a tax deductible expense for the purpose of computing the taxable income under the Income Tax.

Mukharjee, Amitabha and Mohammed Hanif. 1998. Modern Accounting. 4th ed. Vol. II. New Delhi: Tata McGraw-Hill Publishing Company Ltd.