Hire Purchase and Instalment Sale Transactions: Notes | Accounting for CA Intermediate (Old Scheme) PDF Download

 Page 1


 
LEARNING OUTCOMES 
*   
 
 
HIRE PURCHASE AND 
INSTALMENT SALE 
TRANSACTIONS  
 
 
 
After studying this chapter, you will be able to– 
? Understand the salient features and nature of Hire purchase 
transactions. 
? Journalize the Hire purchase entries both in the books of hire 
purchaser and the hire vendor. 
? Learn various methods of accounting for hire purchase 
transactions. 
? Ascertain various missing values, required while accounting 
the hire purchase transactions, on the basis of given 
information. 
? Calculate and record the value of repossessed goods and also 
to calculate the profit on re-sale of such goods. 
? Understand the instalment payment system and also how it 
is different from hire purchase transactions.  
11 
CHAPTER 
Page 2


 
LEARNING OUTCOMES 
*   
 
 
HIRE PURCHASE AND 
INSTALMENT SALE 
TRANSACTIONS  
 
 
 
After studying this chapter, you will be able to– 
? Understand the salient features and nature of Hire purchase 
transactions. 
? Journalize the Hire purchase entries both in the books of hire 
purchaser and the hire vendor. 
? Learn various methods of accounting for hire purchase 
transactions. 
? Ascertain various missing values, required while accounting 
the hire purchase transactions, on the basis of given 
information. 
? Calculate and record the value of repossessed goods and also 
to calculate the profit on re-sale of such goods. 
? Understand the instalment payment system and also how it 
is different from hire purchase transactions.  
11 
CHAPTER 
 
 
11.2 
 
ACCOUNTING 
  
 
 
 
Distinction between sales under 
Hire purchase and Instalment
payment system
Definition of Important terms 
used in Hire Purchase transa
ctions 
Ascertainment of Cash price 
and Interest 
Accounting for hire purchase 
transactions in  books of Hire 
Purchaser and Hire Vendor 
Repossession and Recording 
the value of repossessed 
goods
Accounting for sales under 
Instalment payment system
Methods of Accounting for hire purchase transactions
In Hire Purchaser's  books 
Cash price 
method
Interest 
suspense 
method
In Hire Vendor's books 
Sales method
Interest 
suspense 
method
 
Page 3


 
LEARNING OUTCOMES 
*   
 
 
HIRE PURCHASE AND 
INSTALMENT SALE 
TRANSACTIONS  
 
 
 
After studying this chapter, you will be able to– 
? Understand the salient features and nature of Hire purchase 
transactions. 
? Journalize the Hire purchase entries both in the books of hire 
purchaser and the hire vendor. 
? Learn various methods of accounting for hire purchase 
transactions. 
? Ascertain various missing values, required while accounting 
the hire purchase transactions, on the basis of given 
information. 
? Calculate and record the value of repossessed goods and also 
to calculate the profit on re-sale of such goods. 
? Understand the instalment payment system and also how it 
is different from hire purchase transactions.  
11 
CHAPTER 
 
 
11.2 
 
ACCOUNTING 
  
 
 
 
Distinction between sales under 
Hire purchase and Instalment
payment system
Definition of Important terms 
used in Hire Purchase transa
ctions 
Ascertainment of Cash price 
and Interest 
Accounting for hire purchase 
transactions in  books of Hire 
Purchaser and Hire Vendor 
Repossession and Recording 
the value of repossessed 
goods
Accounting for sales under 
Instalment payment system
Methods of Accounting for hire purchase transactions
In Hire Purchaser's  books 
Cash price 
method
Interest 
suspense 
method
In Hire Vendor's books 
Sales method
Interest 
suspense 
method
 
 
 
11.3 
 
HIRE PURCHASE AND INSTALLMENT SALE … 
 1. INTRODUCTION 
With an increasing demand for better life, the consumption of goods has been on 
the expanding scale. But this has not been backed up by adequate purchasing power, 
transforming it into effectual demand, i.e., actual sale at set or settled prices. This has 
created the market for what is called hire purchase.  
When a person wants to acquire an asset, but is not sure how to make payment 
within a stipulated period of time he may pay in instalments if the vendor agrees. 
This enables the purchaser to use the asset while paying for it in instalments over an 
agreed period of time. This type of a business deal is known as hire purchase 
transaction. Here, the customer pays the entire amount either in monthly or quarterly 
or yearly instalments, while the asset remains the property of the seller until the buyer 
squares up his entire liability. For the seller, the agreed instalments include his 
interest on the assets given on credit to the purchaser. Therefore, when the total 
amount (being paid in instalments over a period of time) is certainly higher than the 
cash down price of the asset because of interest charges. Obviously, both the parties 
benefit in the bargain. By virtue of this, the purchaser has the right of immediate use 
of the asset without making immediate full payment for the asset, by this, he gets 
both credit and product from the same seller.  From seller’s view point, he derives 
the benefits by way of increase in sales and also he recovers his own cost of credit. 
 2. NATURE OF HIRE PURCHASE AGREEMENT 
Under the Hire Purchase System the Hire Purchaser gets possession of the goods at 
the outset and can use it, while paying for it in instalments over a specified period of 
time as per the agreement. However, the ownership of the goods remains with the 
Hire Vendor until the hire purchaser has paid all the instalments. Each instalment 
paid by the hire purchaser is treated as hire charges for using the asset. In case he 
fails to pay any of the instalments (even the last one) the hire vendor has the right to 
take back his goods without compensating the buyer, i.e., the hire vendor is not 
going to pay back a part or whole of the amount received through instalments till 
the date of default from the buyer. 
 3. SPECIAL FEATURES OF HIRE PURCHASE  
   AGREEMENT 
1. Possession: The hire vendor transfers only possession of the goods to the 
hire purchaser immediately after the contract for hire purchase is made. 
Page 4


 
LEARNING OUTCOMES 
*   
 
 
HIRE PURCHASE AND 
INSTALMENT SALE 
TRANSACTIONS  
 
 
 
After studying this chapter, you will be able to– 
? Understand the salient features and nature of Hire purchase 
transactions. 
? Journalize the Hire purchase entries both in the books of hire 
purchaser and the hire vendor. 
? Learn various methods of accounting for hire purchase 
transactions. 
? Ascertain various missing values, required while accounting 
the hire purchase transactions, on the basis of given 
information. 
? Calculate and record the value of repossessed goods and also 
to calculate the profit on re-sale of such goods. 
? Understand the instalment payment system and also how it 
is different from hire purchase transactions.  
11 
CHAPTER 
 
 
11.2 
 
ACCOUNTING 
  
 
 
 
Distinction between sales under 
Hire purchase and Instalment
payment system
Definition of Important terms 
used in Hire Purchase transa
ctions 
Ascertainment of Cash price 
and Interest 
Accounting for hire purchase 
transactions in  books of Hire 
Purchaser and Hire Vendor 
Repossession and Recording 
the value of repossessed 
goods
Accounting for sales under 
Instalment payment system
Methods of Accounting for hire purchase transactions
In Hire Purchaser's  books 
Cash price 
method
Interest 
suspense 
method
In Hire Vendor's books 
Sales method
Interest 
suspense 
method
 
 
 
11.3 
 
HIRE PURCHASE AND INSTALLMENT SALE … 
 1. INTRODUCTION 
With an increasing demand for better life, the consumption of goods has been on 
the expanding scale. But this has not been backed up by adequate purchasing power, 
transforming it into effectual demand, i.e., actual sale at set or settled prices. This has 
created the market for what is called hire purchase.  
When a person wants to acquire an asset, but is not sure how to make payment 
within a stipulated period of time he may pay in instalments if the vendor agrees. 
This enables the purchaser to use the asset while paying for it in instalments over an 
agreed period of time. This type of a business deal is known as hire purchase 
transaction. Here, the customer pays the entire amount either in monthly or quarterly 
or yearly instalments, while the asset remains the property of the seller until the buyer 
squares up his entire liability. For the seller, the agreed instalments include his 
interest on the assets given on credit to the purchaser. Therefore, when the total 
amount (being paid in instalments over a period of time) is certainly higher than the 
cash down price of the asset because of interest charges. Obviously, both the parties 
benefit in the bargain. By virtue of this, the purchaser has the right of immediate use 
of the asset without making immediate full payment for the asset, by this, he gets 
both credit and product from the same seller.  From seller’s view point, he derives 
the benefits by way of increase in sales and also he recovers his own cost of credit. 
 2. NATURE OF HIRE PURCHASE AGREEMENT 
Under the Hire Purchase System the Hire Purchaser gets possession of the goods at 
the outset and can use it, while paying for it in instalments over a specified period of 
time as per the agreement. However, the ownership of the goods remains with the 
Hire Vendor until the hire purchaser has paid all the instalments. Each instalment 
paid by the hire purchaser is treated as hire charges for using the asset. In case he 
fails to pay any of the instalments (even the last one) the hire vendor has the right to 
take back his goods without compensating the buyer, i.e., the hire vendor is not 
going to pay back a part or whole of the amount received through instalments till 
the date of default from the buyer. 
 3. SPECIAL FEATURES OF HIRE PURCHASE  
   AGREEMENT 
1. Possession: The hire vendor transfers only possession of the goods to the 
hire purchaser immediately after the contract for hire purchase is made. 
 
 
11.4 
 
ACCOUNTING 
2. Installments: The goods are delivered by the hire vendor on the condition 
that a hire purchaser should pay the amount in periodical instalments. 
3. Down Payment: The hire purchaser generally makes a down payment, i.e., an 
amount on signing the agreement. 
4. Constituents of Hire purchase instalments: Each instalment consists of two 
elements- finance charge (interest on unpaid amount) and capital payment. 
5. Ownership: The property in goods is to pass to the hire purchaser on the 
payment of the last instalment and exercising the option conferred upon him 
under the agreement. 
6. Repossession: In case of default in respect of payment of even the last 
instalment, the hire vendor has the right to take the goods back without 
making any compensation. 
 4. TERMS USED IN HIRE PURCHASE AGREEMENTS 
1. Hire Vendor: Hire vendor is a person who delivers the goods along with its 
possession to the hire purchaser under a hire purchase agreement.  
2. Hire Purchaser: Hire purchaser is a person who obtains the goods and rights 
to use the same from hire vendor under a hire purchase agreement. 
3. Cash Price: Cash price is the amount to be paid by the buyer on outright 
purchase in cash. 
4. Down Payment:  Down payment is the initial payment made to the hire 
vendor by the hire purchaser at the time of entering into a hire purchase 
agreement. 
5. Hire Purchase Instalment: Hire purchase instalment is the amount which the 
hire purchaser has to pay after a regular interval upto certain period as 
specified in the agreement to obtain the ownership of the asset purchased 
(on payment of the last instalment) under a hire purchase agreement. It 
comprises of principal amount and the interest on the unpaid amount. 
6. Hire purchase price: It means the total sum payable by the hire purchaser to 
obtain the ownership of the asset purchased under hire purchase agreement.  
It comprises of cash price and interest on outstanding balances. 
 
Page 5


 
LEARNING OUTCOMES 
*   
 
 
HIRE PURCHASE AND 
INSTALMENT SALE 
TRANSACTIONS  
 
 
 
After studying this chapter, you will be able to– 
? Understand the salient features and nature of Hire purchase 
transactions. 
? Journalize the Hire purchase entries both in the books of hire 
purchaser and the hire vendor. 
? Learn various methods of accounting for hire purchase 
transactions. 
? Ascertain various missing values, required while accounting 
the hire purchase transactions, on the basis of given 
information. 
? Calculate and record the value of repossessed goods and also 
to calculate the profit on re-sale of such goods. 
? Understand the instalment payment system and also how it 
is different from hire purchase transactions.  
11 
CHAPTER 
 
 
11.2 
 
ACCOUNTING 
  
 
 
 
Distinction between sales under 
Hire purchase and Instalment
payment system
Definition of Important terms 
used in Hire Purchase transa
ctions 
Ascertainment of Cash price 
and Interest 
Accounting for hire purchase 
transactions in  books of Hire 
Purchaser and Hire Vendor 
Repossession and Recording 
the value of repossessed 
goods
Accounting for sales under 
Instalment payment system
Methods of Accounting for hire purchase transactions
In Hire Purchaser's  books 
Cash price 
method
Interest 
suspense 
method
In Hire Vendor's books 
Sales method
Interest 
suspense 
method
 
 
 
11.3 
 
HIRE PURCHASE AND INSTALLMENT SALE … 
 1. INTRODUCTION 
With an increasing demand for better life, the consumption of goods has been on 
the expanding scale. But this has not been backed up by adequate purchasing power, 
transforming it into effectual demand, i.e., actual sale at set or settled prices. This has 
created the market for what is called hire purchase.  
When a person wants to acquire an asset, but is not sure how to make payment 
within a stipulated period of time he may pay in instalments if the vendor agrees. 
This enables the purchaser to use the asset while paying for it in instalments over an 
agreed period of time. This type of a business deal is known as hire purchase 
transaction. Here, the customer pays the entire amount either in monthly or quarterly 
or yearly instalments, while the asset remains the property of the seller until the buyer 
squares up his entire liability. For the seller, the agreed instalments include his 
interest on the assets given on credit to the purchaser. Therefore, when the total 
amount (being paid in instalments over a period of time) is certainly higher than the 
cash down price of the asset because of interest charges. Obviously, both the parties 
benefit in the bargain. By virtue of this, the purchaser has the right of immediate use 
of the asset without making immediate full payment for the asset, by this, he gets 
both credit and product from the same seller.  From seller’s view point, he derives 
the benefits by way of increase in sales and also he recovers his own cost of credit. 
 2. NATURE OF HIRE PURCHASE AGREEMENT 
Under the Hire Purchase System the Hire Purchaser gets possession of the goods at 
the outset and can use it, while paying for it in instalments over a specified period of 
time as per the agreement. However, the ownership of the goods remains with the 
Hire Vendor until the hire purchaser has paid all the instalments. Each instalment 
paid by the hire purchaser is treated as hire charges for using the asset. In case he 
fails to pay any of the instalments (even the last one) the hire vendor has the right to 
take back his goods without compensating the buyer, i.e., the hire vendor is not 
going to pay back a part or whole of the amount received through instalments till 
the date of default from the buyer. 
 3. SPECIAL FEATURES OF HIRE PURCHASE  
   AGREEMENT 
1. Possession: The hire vendor transfers only possession of the goods to the 
hire purchaser immediately after the contract for hire purchase is made. 
 
 
11.4 
 
ACCOUNTING 
2. Installments: The goods are delivered by the hire vendor on the condition 
that a hire purchaser should pay the amount in periodical instalments. 
3. Down Payment: The hire purchaser generally makes a down payment, i.e., an 
amount on signing the agreement. 
4. Constituents of Hire purchase instalments: Each instalment consists of two 
elements- finance charge (interest on unpaid amount) and capital payment. 
5. Ownership: The property in goods is to pass to the hire purchaser on the 
payment of the last instalment and exercising the option conferred upon him 
under the agreement. 
6. Repossession: In case of default in respect of payment of even the last 
instalment, the hire vendor has the right to take the goods back without 
making any compensation. 
 4. TERMS USED IN HIRE PURCHASE AGREEMENTS 
1. Hire Vendor: Hire vendor is a person who delivers the goods along with its 
possession to the hire purchaser under a hire purchase agreement.  
2. Hire Purchaser: Hire purchaser is a person who obtains the goods and rights 
to use the same from hire vendor under a hire purchase agreement. 
3. Cash Price: Cash price is the amount to be paid by the buyer on outright 
purchase in cash. 
4. Down Payment:  Down payment is the initial payment made to the hire 
vendor by the hire purchaser at the time of entering into a hire purchase 
agreement. 
5. Hire Purchase Instalment: Hire purchase instalment is the amount which the 
hire purchaser has to pay after a regular interval upto certain period as 
specified in the agreement to obtain the ownership of the asset purchased 
(on payment of the last instalment) under a hire purchase agreement. It 
comprises of principal amount and the interest on the unpaid amount. 
6. Hire purchase price: It means the total sum payable by the hire purchaser to 
obtain the ownership of the asset purchased under hire purchase agreement.  
It comprises of cash price and interest on outstanding balances. 
 
 
 
11.5 
 
HIRE PURCHASE AND INSTALLMENT SALE … 
 5. ASCERTAINMENT OF CASH PRICE 
We know that the basis for accounting in the books of the hire purchaser is the 
total cash price. Sometimes, the total cash price may not be given. For the purpose 
of ascertaining the total cash price, we can use any of the following methods 
according to the need. 
 
5.1. Calculation of Cash Price without using Annuity Table 
In this method, the interest included in the last instalment is to be calculated first 
with the help of the appropriate formula (explained below). 
For example in a hire purchase transaction, apart from down payment, four other 
instalments are payable. The interest will be calculated first on the 4th instalment, 
then on the 3rd instalment, then on the 2nd instalment and lastly on the 1st 
instalment. Interest on down payment will be nil. 
In this connection, it should be noted that the amount of interest will go on 
increasing from the 4th instalment to the 3rd instalment, from the 3rd instalment 
to the 2nd instalment and from the 2nd instalment to the 1st instalment. 
We know that interest is to be calculated on the outstanding balance of cash price. 
In this case, we will have to calculate the interest with the help of the total amount 
due on hire purchase price since the cash price is not known.  For the purpose of 
calculating the interest, the following steps should be followed: 
Step 1 : Calculate the ratio between interest and the amount due with the help 
of the following formula: 
 
Rateof interest
Ratioofinterestandamountdue  
100 Rateof interest
=
+
 
Step 2: Calculate the interest included in the last instalment by applying the 
following formula: 
Calculation of total cash price 
Without using annuity table With the help of annuity table