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a man brought a machine by hire purchase system. he paid₹600 cash down₹640 at the interest on the cash price is10% per annum. write up the hire purchasers account in the books of the vendor.
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a man brought a machine by hire purchase system. he paid₹600 cash down...
Hire Purchase Accounting
Basic Concepts
Definition
Hire purchase is a type of transaction in which a buyer purchases goods by paying an initial down payment and the remaining amount in installments over a defined period. The seller retains the ownership of the goods until the buyer pays the full amount.
Components of a Hire Purchase Transaction
A hire purchase transaction involves the following components:
- Cash down payment
- Installments
- Interest
Example Problem
A man brought a machine by hire purchase system. He paid ₹600 cash down and ₹640 at the interest on the cash price is 10% per annum. Write up the hire purchasers account in the books of the vendor.
Solution
To record the hire purchase transaction in the vendor's books, we need to create two accounts: Hire Purchaser's Account and Interest on Hire Purchase Account.
Hire Purchaser's Account
Debit: Machine (Cash Price) ₹ 704
Credit: Hire Purchaser's Account ₹ 704
Interest on Hire Purchase Account
Debit: Interest on Hire Purchase ₹ 64
Credit: Hire Purchaser's Account ₹ 64
In the above entries, we have debited the Hire Purchaser's Account with the cash price of the machine, which is ₹704. We have credited the same account with the same amount to balance the entry. We have also debited the Interest on Hire Purchase Account with the interest amount of ₹64 and credited the Hire Purchaser's Account with the same amount to balance the entry.
Thus, the vendor's books would show the following entries:
Machine (Cash Price) ₹ 704
To Hire Purchaser's Account ₹ 704
To Interest on Hire Purchase ₹ 64
By Hire Purchaser's Account ₹ 768
The vendor would receive the installment payments from the hire purchaser in future, which would be recorded as a reduction in the balance of the Hire Purchaser's Account.
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a man brought a machine by hire purchase system. he paid₹600 cash down...
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