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Accounting for Hire Purchase - Financial Accounting - B.Com | Karan Arora | Study Khazana Video Lecture - B Com

FAQs on Accounting for Hire Purchase - Financial Accounting - B.Com - Karan Arora - Study Khazana Video Lecture - B Com

1. What is hire purchase in accounting?

Ans. Hire purchase is a method of financing the purchase of an asset, where the buyer pays for the asset in installments over a period of time. The buyer takes possession of the asset immediately but becomes the legal owner only after the final installment is paid.

2. How is hire purchase recorded in financial accounting?

Ans. In financial accounting, hire purchase transactions are recorded by creating two separate accounts: the Hire Purchase Asset account and the Hire Purchase Liability account. The Hire Purchase Asset account represents the asset being purchased, while the Hire Purchase Liability account represents the outstanding amount to be paid.

3. What are the advantages of hire purchase for businesses?

Ans. Hire purchase offers several advantages for businesses, including: - Immediate access to the asset without making a lump sum payment. - Flexibility in payment terms, allowing businesses to manage their cash flow. - Potential tax benefits, as the interest paid on hire purchase agreements is often tax-deductible. - Option to upgrade or replace the asset at the end of the hire purchase agreement.

4. What are the disadvantages of hire purchase for businesses?

Ans. While hire purchase has its advantages, it also has some disadvantages for businesses, such as: - Higher overall cost, as interest is charged on the outstanding amount. - Limited ownership rights until the final installment is paid. - Potential risk of repossession if the buyer fails to make timely payments. - Potential impact on the business's credit rating if payments are not made as agreed.

5. How is interest calculated in hire purchase agreements?

Ans. Interest in hire purchase agreements is typically calculated on the outstanding balance of the asset. The interest rate is agreed upon at the beginning of the agreement and is usually fixed for the duration of the contract. The total interest payable over the hire purchase period can be calculated by multiplying the outstanding balance by the interest rate and the number of payment periods.

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