Accounting for Hire Purchase

It is not always possible for a purchaser to meet up the higher demand for goods due to immediate cash payment. To meet this demand the concept of Hire Purchase is very popular in the market. In this method, Hirer (Purchaser) pays the entire amount in installments, either yearly, monthly, or quarterly with some interest.

Features of Hire Purchase

• Possession of goods is delivered to a hirer, but the title of the goods (ownership) is transferred only when the agreed sum (Hire Purchase price) is paid by the hirer.
• The hirer has an option to return the goods, and in this case, he need not pay installments. However, the hirer can not recover the sums already paid as such sums legally represent hire charges of the goods in question.
• The hirer is supposed to take care of goods as a prudent person does of his own goods. During the period of possession of goods, the hirer cannot damage, destroy, pledge, or sell such goods.

Accounting Method for Hire Purchase

There are mainly three methods of accounting for hire-purchase, Debtors Method, Stock-Debtors Method, and Final Accounts Method.

Debtors Method or Hire Purchase Trading (Stock Approach)

Under this method, both double entry ledger accounts and memorandum accounts are maintained for recording hire purchase transactions. The double entry accounts maintained are H.P. Trading A/c, General Trading A/c (if any), and Goods sold on H.P. A/c, and the Memorandum accounts are Memorandum H.P. Stock A/c, Memorandum H.P. Debtors A/c, Memorandum Shop/Godown Stock A/c (if any). The profit/loss from the hire purchase transaction gets determined through H.P. Trading A/c. Under this method, the hire purchase transactions are accounted for as under:

 

Performa of H. P. Trading Account

Books of Hire Vendor

Hire Purchase Trading A/c for the year ended (20xx)

 

[B]       STOCK – DEBTORS METHOD

Under this method, the basic principle is to do complete accounting of all hire purchase transactions under double entry system. The ledger accounts that are maintained in this case are: H.P. Stock A/c, H.P. Stock Adjustment A/c, H.P. Debtors A/c, Shop/ Godown Stock A/c (if any) and Goods sold on H.P A/c. In case of repossession of goods by hire vendor, Repossessed Stock A/c is maintained. The profit/loss is determined through H.P. Stock Adjustment A/c.

 

Under this method, the hire purchase transactions are accounted for as under:

 

[C]       FINAL ACCOUNTS METHOD or HIRE PURCHASE TRADING (Transaction Approach)

This method is based on the basic principle of complete double entry accounting of all hire purchase transactions. Double entry ledger accounts that are maintained are – H.P. Trading A/c, H.P. Debtors A/c, H.P. Sales A/c.

H.P. Sales Account: It records value of goods sold on hire purchase basis and installments matured during

The period. Thus, the closing balance reflects the amount of ‘Unmatured installments’.

H.P. Debtors Account: It records value of goods sold on hire purchase basis and the collection from the customers. Closing balance reflects both ‘Matured Installments but not yet received (customers paying)’ and ‘ Unmatured Installments’.

Under this method, the operating result (i.e Profit/Loss) gets determined through H.P. Trading Account.

Hire Purchase transactions under this method are accounted as follows:

 

Format of H.P Trading A/c

Books of Hire Vendor

Hire Purchase Trading A/c for the year ended (20xx)

 

Illustration

ABC Ltd. sells its products only on hire purchase terms, the hire purchase price being ‘cost plus 33.33%’. From the given information, you are required determine the operating results from the hire purchase transactions by drafting necessary accounts under each of the following methods:

A. Debtors Method

B. Stock-Debtors Method

C. Final Accounts Method

Further information:

1. Goods repossessed (installments not yet matured 12,000) valued at 4,800;
2. Purchases made during the year 2021-22 amounted to ` 4,08,000;
3. Cash collected from customers during 2021-22 was ` 4, 80,000.

From the given information, you are required independently determine the operating results from the hire purchase transactions by drafting necessary accounts under each of the following methods:

 

[A]           Debtors Method;

[B]           Stock-Debtors Method; and

[C]           Final Accounts Method

 

SOLUTION:

Method A: Debtors Method

Books of ABC Ltd.

Hire Purchasing Trading Account

            for the year ended 31.3.2022          

1. CR.

Particulars	Amount	Particulars	Amount
To, H.P. Stock [at H.P. price: 1.4.2021]	2,40,000	By, Stock Reserve [2,40,000 × 1/4]	60,000
To, H.P. Debtors [1.4.2017]	18,000	By, Goods sent on H.P. [ Load: 5,28,000 × ¼]	1,32,000
To, Goods sent on H.P. [at H.P. Price – W.N:1]	5,28,000	By, Cash Received	4,80,000
To, Loss on Repossession [WN:4]	7,200	By, Goods Repossessed[Unmatured Installments]	12,000
To, Stock Reserve [2,64,000 × 1/4]	66,000	By, H.P. Stock [at H.P. Price: 31.3.2022- WN:3]	2,64,000
To, General P/L A/c [ Profit on H.P transferred	1,18,000	By, H.P. Debtors [ 31.3.2022]	30,000
	9,78,000		9,78,000

 

 

 

Working Notes:

1. Goods sent on H.P. basis ( at H.P. price)

Memorandum Shop Stock Account

Particulars	Amount	Particulars	Amount
To, Opening Balance	30,000	By, Goods sent on H.P [at cost: Bal. Fig.]	3,96,000
To, Purchases	4,08,000	By, Closing Balance	42,000
	4,38,000		4,38,000

 

Therefore, Goods Sent on H.P [at H.P price] = 3, 96,000 + 33 1/3% = ` 5, 28,000.

 

2. Installments Matured during the year

Memorandum H.P Debtors Account

Particulars	Amount	Particulars	Amount
To, Opening Balance [Installments due]	18,000	By, Cash Received	4,80,000
To, Installments Matured [Bal. Fig.]	4,92,000	By, Closing Balance [Installments due]	30,000
	5,10,000		5,10,000

 

 

3. Balance of H.P. Stock on 31.3.2022

Memorandum H.P. Stock Account

 

Particulars	Amount	Particulars	Amount
To, Opening Balance [ stock out on hire purchase at H.P price]	2,40,000	By, Installments Matured [WN:2]	4,92,000
To, Goods sent on H.P [WN:1]	5,28,000	By, Goods Repossessed [Unmatured installments]	12,000
		By, Closing   Balance   [Stock   with Customers at SP – Bal. fig.]	2,64,000
	7,68,000		7,68,000

 

 

4. Loss on Repossession = Installments not yet matured on repossessed goods – Value on repossession =

` [12,000 – 4,800] = ` 7,200. It is to be debited to H.P. Trading A/c.

Alternatively, Instead of recording value of “Goods Repossessed” and “Loss on Repossession”, the value on repossession ` 4,800 may be reflected on the credit side of H.P. Trading A/c.

 

Method B: Stock-Debtors Method

Books of ABCLtd.

                           Shop Stock Account 

 

1. CR.

Date	Particular	Amount	Date	Particular	Amount
31.3.22	To, Shop Stock A/c [Cost of goods sent	3,96,000	31.3.22	By, H.P. Stock A/c [Goods sent at H.P Price]	5,28,000
31.3.22	To, H.P Stock Adjustment A/c [Loading on goods sent: 3,96,000 × 1/3]	1,32,000
		5,28,000			5,28,000

 

 

H.P Stock Account

1. CR.

Date	Particular	Amount	Date	Particular	Amount
1.4.21	To, Balance b/f [stock with customers at H.P Price]	2,40,000	31.3.22	BY H.P. Debtors A/c [Matured Installments]	4,92,000
31.3.22	To, Goods sent on H.P A/c [at H.P Price]	5,28,000	31.3.22	By, Goods Repossessed A/c	12,000
				By, Balnaceb/f [Stock with customers at H.P Price: Bal. Fig]	2,64,000
	7,68,000				7,68,000

H.P. Debtors Account

1. CR.

Date	Particular	Amount	Date	Particular	Amount
1.4.21	To, Balance b/f [ Installments overdue]	18,000	31.3.22	By, Bank A/c [Cash Received]	4,80,000
31.3.22	To, H.P Stock A/c [Matured Installments: Bal. Fig]	4,92,000	31.3.22	By, Balance b/f [Installments overdue]	30,000
		5,10,000			5,10,000

 

 

H.P. Stock Adjustment Account

1. CR.

Date	Particulars	Amount	Date	Particulars	Amount
31.3.22	To, Goods Repossessed A/c [Repossession Loss]	7,200	1.4.21	By, Balance b/f [Load on opening H.P Stock: 2,40,000 × ¼]	60,000
31.3.22	To, General P/L A/c [ H.P Profit transferred]	1,18,800	31.3.22	By, Goods Sent on H.P A/c [Load on goods sent: 5,28,000 × ¼]	1,32,000
31.3z.22	To, Balance c/f [Load on Closing H.P Stock: 2,64,000 × ¼ ]	66,000
		1,92,000			1,92,000

 

 

Goods Repossessed Account

1. CR.

Date	Particulars	Amount	Date	Particulars	Amount
31.3.22	To, H.P Stock A/c [Installments not matured]	12,000	31.3.22	By, H.P. Stock Adj. A/c [Repossession Loss]	7,200
			31.3.22	By, Balance c/f	4,800
		12,000			12,000

 

 

 

Method C: Final Accounts Method

Books of ABC Ltd.

Hire Purchase Trading Account for the year ended 31.3.2022

1. CR.

Particulars	Amount	Particulars	Amount
To, Balance b/f:		By, H.P Sales [Matured Installments – WN:1]By, Balance c/f:	4,92,000
Stock at shop	30,000	Stock at Shop	42,000
Stock with customer	1,80,000	Stock with Customer                           [2,64,000 × ¾ ] (WN:2)	1,98,000
To, Purchases	4,08,000	Repossessed Goods	4,800
To, General P/L A/c [Profit on H. P. transferred]	1,18,800
	7,36,800		7,36,800

 

Working Notes:

1. Matured Installments during 2021-22:

Dr.                     H.P. Sales Account             Cr.

Particulars	Amount	Particulars	Amount
To, H.P. Trading A/c [Matured Installments- B/Fig]	4,92,000	By, Balance b/f: Stock with customer	2,40,000
To, H.P. Sales A/c [Installment due on repossessed goods],	12,000	By, H.P. Debtors A/c [Goods sold on H.P. basis – WN:3]	5,28,000
ToBalance c/f:  Stock with Customer	2,64,000
	7,68,000		7,68,000

 

 

2. Stock with customers at H.P. Price on 31.3.2022:

Dr.                     H.P. Debtors Account       Cr.

Particulars	Amount	Particulars	Amount
To, Balance b/f:		By, Cash A/c [Received during the year]	4,80,000
Stock with Customer	2,40,000	By, H.P. Sales A/c [Installment due on repossessed goods]	12,000
Installment overdue	18,000	By, Balance c/f:Stock with Customer	2,64,000
To, H.P. Sales A/c [Goods sold on H.P. basis – WN:3]	5,28,000	Installments due	30,000
	7,86,000		7,86,000

 

 

3. Goods sent on H.P basis (at H.P. Price) during 2021-22

Cost of goods sent under H.P basis:

Opening Shop Stock + Purchases – Closing Shop Stock

= ` [30,000 + 4, 08,000 – 42,000] = ` 3, 96,000

 Goods sold on H.P. basis at H.P. Price = Cost of goods sold under H.P. basis + Profit

= ` 3, 96,000 + 33.33 % = ` 5, 28,000