Hire Purchase Accounting & Instalment Purchase System
Hire Purchase Accounting & Instalment Purchase System
Hire Purchase Accounting & Instalment Purchase System
Total Cash Price is Rs. 28,000 and Interest is charged @10% p.a.
Solution
Date Type Cash Price/Cost Interest Hire Purchase Price (HPP)
01.01.2010 Down Payment Rs. 8,000 NIL 8000
31.12.2010 1st Instalment Rs. 5,000 2000 7000
31.12.2011 2nd Instalment Rs. 5,000 1500 6500
31.12.2012 3rd Instalment Rs. 5,000 1000 6000
31.12.2013 4th Instalment Rs. 5,000 500 5500
Recording of Transactions: In the Books of
Hire Purchaser
• Assets Account
• Hire Vendor Account
• Interest Account
• Depreciation Account
• Profit & Loss Account
Assets Accrual Method: Accounting Entries in the Books of Purchaser
3. At the end of the year or any other time when an instalment falls
due:
Asset A/c Dr. [Principal Amount or Cash Price in Instalment]
To Asset A/c
6. At the end of the year for closing Depreciation A/c and Interest A/c:
Profit & Loss A/c Dr.
To Depreciation A/c
To Interest A/c
Note: Entries number 3, 4, 5 and 6 are to be repeated for 2nd year and
subsequent years till the last instalment in paid off.
Problem 1: Journal Entries
The cash price of the Machine bought by Hire Purchaser on 1/4/2016
under HP system was Rs. 7,45,000.
On signing the agreement Rs. 2,00,000 was to be paid & balance in
three instalments of Rs.2,00,000 each at the end of each year.
5% p.a. Interest was charged by Hire Vendor.
10% Depreciation is to be charged annually on reducing balance
method.
Solution (Forward Table)
(a) (b) (c) =(b) X 5% (d) (e) =(d) –(c) (f) = (b) – (e) Depreciation
Year Outstanding Balance Interest@5% HPP Cash Price Outstanding (Rs.)
(of Cash Price) at or Principal Balance (of
Beginning (Rs.) Cash Price) at
the End
1st April - - 2,00,000 2,00,000 - -
2016
31st March (Rs. 7,45,000 – 27,250 2,00,000 1,72,750 3,72,250 7,45,000 X
2017 Rs.2,00,000) 10/100 =
=5,45,000 74,500
31st March 3,72,250 18,612.5 2,00,000 1,81,387.5 1,90,862.5 6,70,500 X
2018 10/100 =
67,050
31st March 1,90,862.5 9,137.5 (B.F) 2,00,000 1,90,862.5 Nil 6,03,450 X
2019 10/100
=60,345
Total 55,000 8,00,000 7,45,000
Problem
Mr. Robert purchased a motorcycle on hire purchase system on
1.1.2018. As per agreement he has to pay Rs. 3,600 down and Rs. 5,100
at the end of the first year, Rs. 4,800 at the end of second year and Rs.
16,500 at the end of the third year. Interest is charged @10% p.a.
Depreciation @10% on WDV method. You are required to calculate
interest, principal and the total cash price. Prepare motorcycle account.