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FAQs on Hire Purchase System : Part 1 - Class Notes, Financial Accounting, Commerce - B Com

1. What is a Hire Purchase System?

Ans. Hire Purchase System is a legal agreement between the buyer and the seller, where the buyer agrees to purchase goods on credit and pay the cost of the goods in installments with interest. Until the final installment is paid, the seller retains the ownership of the goods.

2. What is the difference between Hire Purchase and Leasing?

Ans. In a Hire Purchase System, the buyer has the option to purchase the goods at the end of the payment period, whereas in Leasing, the buyer has to return the goods to the seller. Also, in a Hire Purchase System, the buyer bears the maintenance costs of the goods, whereas in Leasing, it is the responsibility of the seller.

3. What are the advantages of a Hire Purchase System?

Ans. The advantages of a Hire Purchase System are as follows: i. It helps the buyer to purchase goods without paying the full amount upfront. ii. The buyer can use the goods while paying for them in installments. iii. The seller earns interest on the installments made by the buyer. iv. The seller can repossess the goods if the buyer defaults on payment.

4. What are the accounting entries for a Hire Purchase System?

Ans. The accounting entries for a Hire Purchase System are as follows: i. At the time of purchase, the following entry is recorded: Goods A/c Dr. To Hire Purchase Vendor A/c ii. At the time of each installment, the following entry is recorded: Hire Purchase Vendor A/c Dr. To Bank A/c iii. At the end of the payment period, the following entry is recorded: Hire Purchase Vendor A/c Dr. To Goods A/c

5. What happens in case of default in a Hire Purchase System?

Ans. In case of default in a Hire Purchase System, the seller has the right to repossess the goods. The seller can also take legal action against the buyer for the recovery of the outstanding amount. However, before repossessing the goods, the seller must issue a notice to the buyer and give them a chance to rectify the default.

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