Subject: Financial Accounts Topic: Hire Purchase

By: Questionscastle Academic Team Document Code: CA/IPCC/ACC/0008 ------------------------------------------------------------------------------------------------------------------------------------ Hire Purchase System is a system of purchasing on instalment basis. Under this system of purchase the goods are purchased by purchaser on an instalment basis. The only difference between traditional instalment system and hire purchase system is, In hire purchase system the ownership of goods does not pass to the buyer till he pay the last instalment due on him. Although the goods remain with purchaser but legal ownership is with seller. Accounting for hire purchase: The accounting for hire purchase is very easy if you take it as a concept. The following incidental concept of accounting will make it all clear to you. Suppose there is a TV shop selling TV on hire purchase and Mr. X is a customer willing to buy a TV on hire purchase. Now you look at each incident that occurs and how a accounting entry is made for it. S. No. 1 2 3 4 5 6 7 Incident When TV Sets are purchased by TV Shop from manufacturer. When TV sets are ready to be sold at the shop. Addition of profit (to be earned by shop owner) on the TV sets ready for sale. When Mr. X purchased the TV set from shop (includes profit) When instalment is due on customer at the due date (Stock becomes debtor). When instalment is paid by the customer. Accounting Entry

Shop Stock A/c Dr. To Creditor/Bank A/c Cost of Goods Sold Dr. To Shop Stock A/c Cost of Goods Sold Dr. To HP Stock Reserve A/c HP Stock A/c Dr. To Cost of Goods Sold HP Debtor A/c Dr. To HP Stock A/c Cash/Bank A/c Dr. To HP Debtor A/c When instalment is again due on HP Debtor A/c Dr. customer at the due date (Stock becomes To HP Stock A/c debtor). When profit earned on instalments HP Stock Reserve A/c Dr. received from customer is transferred to To P&L A/c P&L a/c

Ledgers to be prepared under Hire purchase accounting system Shop Stock A/c XXX By Trading A/c (Cost Price) XXX By Goods sent on HP (Cost Price) By Bal C/d XXX Goods Sent on HP A/c XXX By HP Stock A/c (Invoice Price) XXX XXX HP Stock A/c

To Bal B/d To Purchase A/c

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To Shop Stock A/c To HP Adjustment A/c (Bal. Fig)

XXX XXX

To Bal B/d To Goods sent on HP A/c (Invoice Price)

XXX XXX

By HP Debtor A/c (Instalment Due) By Goods repossessed A/c (Instalment not due on goods repossessed) By Bal C/d

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XXX HP Debtor A/c XXX By Cash/Bank XXX By Goods Repossessed A/c (Instalment due on goods repossessed) By Bal C/d XXX Goods Repossessed A/c XXX By Bank A/c (If goods XXX repossessed are sold) XXX By HP Adjustment A/c (Bal Fig) By Bal C/d XXX HP Adjustment A/c XXX By Stock Reserve A/c (Loading on Opening bal of HP Stock XXX A/c) XXX By Goods sent on HP XXX

XXX XXX

To Bal B/d To HP Stock A/c (Instalment Due)

XXX XXX XXX XXX

To HP Stock A/c To HP Debtor A/c To HP Adjustment A/c (Bal Fig)

XXX XXX XXX XXX

To Stock Reserve A/c (Loading on closing bal of HP Stock A/c) To P&L A/c (Bal Fig) To Goods Repossessed A/c

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