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Accounting Treatment Of Hire Purchase System Or Methods Of Recording Hire Purchase Transactions

Journal Entries In The Books Of Hire Purchaser
There are two methods of recording hire purchase transactions in the books of the hire purchaser:
i. When the asset is recorded in full cash price-:full cash price method
ii. When the asset is recorded at cash price actually paid in each installment-: Actual cash price method.

1. For the purchase of asset:
First Method
Asset A/C (full cash price)...........Dr.
To vendor A/C

Second Method
No entry

2. For the payment made for 'down payment'
First Method
Vendor A/C.............Dr.
To bank A/C

Second Method
Asset A/C............Dr.
To Bank A/C

3. For installment due
First Method
Interest A/C............Dr.
To vendor A/C

Second Method
Asset A/C (part of cash value)............Dr.
To Interest A/C

4. For the payment of installment (both method)
Vendor A/C............Dr.
To Bank A/C

5. For charging depreciation( on the basis of cash value) (both methods)
Depreciation A/C...................Dr.
To Asset A/C

6. For transfer of interest and depreciation(both methods)
Profit and loss A/C............Dr.
To depreciation A/C
To interest A/C

Note: entries 3,4,5 and 6 will be repeated year after year until the final installment is paid.


Journal Entries In The Books Of Vendor

1. For selling goods on hire purchase
Hire purchase A/C...........Dr.(full cash price)
To sales/hire purchase sales A/C

2. For receiving down payment
Cash/bank A/C.................Dr.
To hire purchaser A/C

3. For installment due
Hire purchaser A/C............Dr.
To Interest A/C

4. For receiving the installment
Cash/bank A/C .............Dr.
To hire purchaser A/C

5. For transferring interest
Interest A/C............Dr.
To profit and loss A/C.

Note: * Depreciation will not charge by hire vendor.
* Entries 3,4 and 5 will be repeated year after year until the first installment is paid.



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