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HIRE PURCHASE AND INSTALLMENT SALE TRANSACTIONS

TYPES OF PRICES

Cost Price Cash Price Hire Purchase Price

HIRE PURCHASE BUSINESS/TRANSACTIONS

1. SUBSTANTIAL VALUE GOODS/SALES 2. SMALL VALUE GOODS/SALES

I. Cash Price Method I. Debtors Method
II. Interest Suspense Method II. Stock and Debtors Method

IN THE BOOKS OF HIRE PURCHASER (Substantial Value Goods/Sales)

1. SUBSTANTIAL VAULE GOODS/SALES Note: Substantial Value Goods is referred for expensive Goods

I. CASH PRICE METHOD:-

JOURNAL ENTRIES
In the Books of HIRE PURCHASER
S.NO. PARTICULARS DR. CR.
1. (When Assets are purchased on Hire Purchase System)
Assets A/c
***
To Hire Vendor’s A/c
***
2. (When Down Payment is made)
Hire Vendor’s A/c
***
To Bank A/c
***
3. (When Interest on Hire Purchase installment becomes Due)
Interest on Hire Purchase A/c
***
To Hire Vendor’s A/c
***
4. (When Installment on Hire Purchase is paid)
Hire Vendor A/c
***
To Bank A/c
***
5. (When Depreciation is charged on Assets)
Depreciation A/c
***
To Assets A/c
***
6. (When Interest on Hire Purchase and Depreciation are transferred to Profit
and Loss Account)
Profit and Loss A/c ***
To Interest on Hire Purchase A/c ***
To Depreciation A/c ***

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1. SUBSTANTIAL VALUE GOODS/SALES---------------CASH PRICE METHOD

LEDGERS
In the Books of Hire Purchaser

HIRE VENDOR’S ACCOUNT

Date Particulars Amt. Date Particulars Amt.
1st Yrs To Bank A/c (Down Payment) *** 1st Yrs By Assets ***
““ To Bank A/c (1st Installment) *** ““ By Interest on Hire Purchase A/c ***
[(Assets-Down Payment)*R%]
““ To Balance c/d ***
### ###
2nd Yrs nd
To Bank A/c (2 Installment) *** 2nd Yrs By Balance b/d ***
““ To Balance c/d *** ““ By Interest on Hire Purchase A/c ***
### ###
rd rd
3 Yrs To Bank A/c (Final Installment) *** 3 Yrs By Balance b/d ***

By Interest on Hire Purchase A/c ***

### ###

Note:
Interest is always calculated on Balance Amount if there is down payment than the interest is calculated
for first Installment after deduction of Down Payment.
Interest can never become a part of Assets that’s why assets are shown on Cash Price.
Liability Decreases shown in Debit side of Hire Vendor’s A/c and
Liability Increases shown in Credit side of Hire Vendor’s A/c

ASSETS ACCOUNT
Date Particulars Amt. Date Particulars Amt.
1st Yrs To Hire Vendor’s A/c *** 1st Yrs By Depreciation A/c ***
*** ““ By Balance c/d ***
### ###
2nd Yrs To Balance b/d *** 2nd Yrs By Depreciation A/c ***
*** ““ By Balance c/d ***
### ###
rd rd
3 Yrs To Balance b/d *** 3 Yrs By Depreciation A/c ***
““ By Balance c/d ***
### ###
4th Yrs To Balance b/d ***

INTEREST ON HIRE PURCHASE ACCOUNT

Date Particulars Amt. Date Particulars Amt.
1st Yrs To Hire Vendor’s A/c *** 1st Yrs By Profit and Loss A/c ***
nd nd
2 Yrs To Hire Vendor’s A/c *** 2 Yrs By Profit and Loss A/c ***
rd rd
3 Yrs To Hire Vendor’s A/c *** 3 Yrs By Profit and Loss A/c ***

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DEPRECIATION ACCOUNT
Date Particulars Amt. Date Particulars Amt.
1st Yrs To Assets A/c *** 1st Yrs By Profit and Loss A/c ***
2nd Yrs To Assets A/c *** 2nd Yrs By Profit and Loss A/c ***
rd rd
3 Yrs To Assets A/c *** 3 Yrs By Profit and Loss A/c ***

Note: When amount are same of both sides just draw double line and close the year.

1. SUBSTANTIAL VAULE GOODS/SALES

II. INTEREST SUSPENSE METHOD:-

JOURNAL ENTRIES

In the Books of HIRE PURCHASER

S.NO. PARTICULARS DR. CR.
1. (When Assets are purchased on Hire Purchase System)
Assets A/c
***
To Hire Vendor’s A/c
***
2. (When Down Payment is made)
Hire Vendor’s A/c
***
To Bank A/c
***
3. (When Total Interest becomes Due)
Interest Suspense A/c
To Hire Vendor’s A/c
4. (When Interest on Hire Purchase installment is charged)
Interest on Hire Purchase A/c
***
To Interest Suspense A/c
***
5. (When Installment on Hire Purchase is paid)
Hire Vendor A/c
***
To Bank A/c
***
6. (When Depreciation is charged on Assets)
Depreciation A/c
***
To Assets A/c
***
7. (When Interest on Hire Purchase and Depreciation are transferred to Profit
and Loss Account)
Profit and Loss A/c ***
To Interest on Hire Purchase A/c ***
To Depreciation A/c ***

Created by Azharuddin Khan under Guidance of Mr. Intakhab Ahmad (BVA)

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1. SUBSTANTIAL VALUE GOODS/SALES---------------INTEREST SUSPENSE METHOD

LEDGERS

In the Books of Hire Purchaser

HIRE VENDOR’S ACCOUNT

Date Particulars Amt. Date Particulars Amt.
1st Yrs To Bank A/c (Down Payment) *** 1st Yrs By Assets ***
““ To Bank A/c (1st Installment) *** ““ By Interest Suspense A/c ***
[Total Interest which becomes due]
““ To Balance c/d ***
### ###
2nd Yrs nd
To Bank A/c (2 Installment) *** 2nd Yrs By Balance b/d ***
““ To Balance c/d ***
### ###
rd rd
3 Yrs To Bank A/c (Final Installment) *** 3 Yrs By Balance b/d ***

### ###

INTEREST SUSPENSE ACCOUNT

Date Particulars Amt. Date Particulars Amt.
1st Yrs To Hire Vendor’s A/c (Total Interest) *** 1st Yrs By Interest on Hire Purchase ***
““ By Balance c/d ***
### ###
nd nd
2 Yrs To Balance b/d *** 2 Yrs By Interest on Hire Purchase ***
““ By Balance c/d ***
### ###
3rd Yrs To Balance b/d *** 3rd Yrs By Interest on Hire Purchase ***

### ###

INTEREST ON HIRE PURCHASE ACCOUNT

Date Particulars Amt. Date Particulars Amt.
1st Yrs To Interest Suspense A/c *** 1st Yrs By Profit and Loss A/c ***
nd nd
2 Yrs To Interest Suspense A/c *** 2 Yrs By Profit and Loss A/c ***
3rd Yrs To Interest Suspense A/c *** 3rd Yrs By Profit and Loss A/c ***

DEPRECIATION ACCOUNT
Date Particulars Amt. Date Particulars Amt.
1st Yrs To Assets A/c *** 1st Yrs By Profit and Loss A/c ***
2nd Yrs To Assets A/c *** 2nd Yrs By Profit and Loss A/c ***
rd rd
3 Yrs To Assets A/c *** 3 Yrs By Profit and Loss A/c ***

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IN THE BOOKS OF HIRE VENDOR (Substantial Value Goods/Sales)

1. SUBSTANTIAL VAULE GOODS/SALES

I. SALES METHOD (HERE CALLED SALES METHOD INSTEAD OF “CASH PRICE METHOD”):-

JOURNAL ENTRIES

In the Books of Hire Vendor

S.NO. PARTICULARS DR. CR.
1. (When Assets/Goods are sold on Hire Purchase System)
Hire Purchaser’s A/c
***
To Hire Purchase Sales A/c
***
2. (When Down Payment is received)
Bank A/c
***
To Hire Purchaser’s A/c
***
3. (When Interest on Hire Purchase installment is charged)
Hire Purchaser’s A/c
***
To Interest on Hire Purchase A/c
***
4. (When Installment on Hire Purchase is received)
Bank A/c
***
To Hire Purchaser’s A/c
***
5. (When Interest on Hire Purchase is transferred to Profit and Loss Account)
Interest on Hire Purchase A/c ***
To Profit and Loss A/c ***
1. SUBSTANTIAL VALUE GOODS/SALES---------------SALES METHOD

LEDGERS

In the Books of Hire Vendor

HIRE PURCHASER’S ACCOUNT
Date Particulars Amt. Date Particulars Amt.
1st Yrs To Hire Purchase Sales A/c *** 1st Yrs By Bank A/c (Down Payment) ***
““ To Interest on Hire Purchase A/c *** ““ By Bank A/c (1st Installment) ***
[(Assets-Down Payment)*R%]
““ By Balance c/d ***
### ###
nd nd
2 Yrs To Balance b/d *** 2 Yrs By Bank A/c (2nd Installment) ***
““ To Interest on Hire Purchase A/c *** ““ By Balance c/d ***
### ###
rd rd
3 Yrs To Balance b/d *** 3 Yrs By Bank A/c (Final Installment) ***

To Interest on Hire Purchase A/c ***

### ###

Note: 1. Increasing in Debtors shown in Debit Side. 2. After Last Installment both sides are equal.

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INTEREST ON HIRE PURCHASE ACCOUNT

Date Particulars Amt. Date Particulars Amt.
1st Yrs To Profit and Loss A/c *** 1st Yrs By Hire Purchaser’s A/c ***
2nd Yrs To Profit and Loss A/c *** 2nd Yrs By Hire Purchaser’s A/c ***
rd rd
3 Yrs To Profit and Loss A/c *** 3 Yrs By Hire Purchaser’s A/c ***

1. SUBSTANTIAL VAULE GOODS/SALES

II. INTEREST SUSPENSE METHOD:-

JOURNAL ENTRIES

In the Books of HIRE VENDOR

S.NO. PARTICULARS DR. CR.

1. (When Assets/Goods are sold on Hire Purchase System)
Hire Purchaser’s A/c
***
To Hire Purchase Sales A/c
***
2. (When Down Payment is received)
Bank A/c
***
To Hire Purchaser’s A/c
***
3. (When Total Interest on Hire Purchase is charged)
Hire Purchaser’s A/c
***
To Interest Suspense A/c
***
4. (When Interest is Charged on Interest Suspense A/c)
Interest Suspense A/c
***
To Interest on Hire Purchase A/c
***
5. (When Interest on Hire Purchase is transferred to Profit and Loss Account)
Interest on Hire Purchase A/c ***
To Profit and Loss A/c ***
6. (When Installment is Received)
Bank A/c ***
To Hire Purchaser’s A/c ***

1. SUBSTANTIAL VALUE GOODS/SALES---------------INTEREST SUSPENSE METHOD

LEDGERS

In the Books of Hire Vendor

(To be Continue on Next Page……….)

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HIRE PURCHASER’S ACCOUNT

Date Particulars Amt. Date Particulars Amt.
1st Yrs To Hire Purchase Sales A/c *** 1st Yrs By Bank A/c (Down Payment) ***
““ To Interest Suspense A/c *** ““ By Bank A/c (1st Installment) ***
[Full Interest Charged on H.P]
By Balance c/d ***
### ###
2nd Yrs To Balance b/d *** 2nd Yrs nd
By Bank A/c (2 Installment) ***
““ By Balance c/d ***
### ###
rd rd
3 Yrs To Balance b/d *** 3 Yrs By Bank A/c (Final Installment) ***

### ###

INTEREST SUSPENSE ACCOUNT

Date Particulars Amt. Date Particulars Amt.
1st Yrs To Interest on Hire Purchase A/c *** 1st Yrs By Hire Purchaser’s A/c ***

To Balance c/d *** ***

### ###
nd nd
2 Yrs To Interest on Hire Purchase A/c *** 2 Yrs By Balance b/d ***

To Balance c/d
### ###
3rd Yrs To Interest on Hire Purchase A/c *** 3rd Yrs By Balance b/d ***

### ###

INTEREST ON HIRE PURCHASE ACCOUNT

Date Particulars Amt. Date Particulars Amt.
1st Yrs To Profit and Loss A/c *** 1st Yrs By Interest Suspense A/c ***
nd nd
2 Yrs To Profit and Loss A/c *** 2 Yrs By Interest Suspense A/c ***
3rd Yrs To Profit and Loss A/c *** 3rd Yrs By Interest Suspense A/c ***

2. SMALL VALUE GOODS/SALES METHOD

I. Debtors Method/System (In the Books of Hire Vendor) LEDGERS

HIRE PURCHASE TRADING A/C (AT COST)

Date Particulars Amt. Date Particulars Amt.
To Shop Stock A/c *** By Cash A/c ***
To Installment Not Due *** By Goods Repossessed (Market Value) ***
To Installment Due *** By Shop Stock A/c ***
Purchase A/c *** By Installment Not Due ***
To Hire Expenses *** By Installment Due ***
To Profit ***
### ###

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HIRE PURCHASE TRADING A/C (AT HIRE PURCHASE PRICE)

Date Particulars Amt. Date Particulars Amt.
To Installment Not Due (HPP) *** By Cash A/c ***
To Installment Due *** By Stock Reserve (Loading) ***
To Goods Sold on Hire Purchase *** By Goods Sold on Hire Purchase ***
(HPP) (Loading)
To Stock Reserve (Loading) *** By Goods Repossessed ***
(Market Value)
To Hire Expenses *** By Installment Not Due (HPP) ***
To Profit *** By Installment Due
By Profit on Sale of Goods ***
Repossessed
### ###

WORKING:
1. CALCULATION OF GOODS SOLD ON HIRE PURCHASE
Opening Stock at Shop ***
Add: Purchases ***
Stock Available ###
Less: Closing Stock at Shop ***
Cost of Goods Sold on Hire Purchase ###
Add: Loading ***
Goods Sold on Hire Purchase ###

(To Find Out Any Missing Figure We Have To Make the Following Accounts)

2. INSTALLMENTS NOT DUE A/C

INSTALLMENT NOT DUE A/C
Date Particulars Amt. Date Particulars Amt.
To Balance b/d *** By Installment Due A/c ***
To Goods Sold on Hire Purchase *** By Goods Repossessed A/c ***
(Original Value)
Note: (Normally not comes in this
account but in few cases)
### ###
3. INSTALLMENTS DUE A/C
INSTALLMENT NOT DUE A/C
Date Particulars Amt. Date Particulars Amt.
To Balance b/d *** By Cash A/c ***
To Installment Not Due A/c *** By Goods Repossessed A/c ***
(Original Value)
By Balance c/d ***
### ###

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2. SMALL VALUE GOODS/SALES METHOD

II. Stock and Debtors System (In the Books of Hire Vendor)

Basic Structure

PURCHAS
E

SHOP

CUSTOMERS

DEBTORS

CASH GOODS REPOSSESSED

NOTE: Here “Installment Not Due A/c” is called “Hire Purchase Stock A/c” and “Installment Due A/c” is called
“Hire Purchase Debtors A/c”

JOURNAL ENTRIES

S.NO. PARTICULARS DR. CR.

1. (When Goods are Purchased)
Purchases A/c
***
To Creditors A/c/Suppliers A/c/Bank A/c
***
2. (When Goods are kept in Shop)
Shop Stock A/c
***
To Purchases A/c
***
3. (When Goods are sold on Hire Purchase)
Hire Purchase Stock A/c
***
To Shop Stock A/c
***
To Hire Purchase Adjustment A/c

4. (When Installment becomes due)

Hire Purchase Debtors A/c
***
To Hire Purchases Stock A/c
***

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5. (When Cash received from Hire Purchase Debtors)
Cash A/c ***
To Hire Purchases Debtors A/c ***
6. (When Goods are repossessed on Account of Non-Payment of Installment)
Goods Repossessed A/c ***
Hire Purchase Adjustment A/c ***
To Hire Purchase Debtors A/c ***
7. (When Goods Repossessed are repaired)
Goods Repossessed A/c ***
To Bank A/c ***
8. (When Goods Repossessed are re-sold)
Bank A/c ***
To Goods Repossessed A/c ***
9. (For recording of Profit/Loss on Sale of Goods repossessed)
(a) In Case of Profit:-
Goods Repossessed A/c ***
To Hire Purchase Adjustment A/c ***
(b) In Case of Loss:-
Hire Purchase Adjustment A/c ***
To Goods Repossessed A/c ***
10. (For Recording of Loading on Opening Stock of Hire Purchase A/c)
Stock Reserve A/c ***
To Hire Purchase Adjustment A/c ***
11. (For Recording of Loading on Closing Stock of Hire Purchase A/c)
Hire Purchase Adjustment A/c ***
To Stock Reserve A/c ***

LEDGERS

SHOP STOCK A/C

Date Particulars Amt. Date Particulars Amt.
To Balance b/d *** By Hire Purchase Stock A/c (At Cost) ***
To Purchases A/c *** By Balance c/d ***
### ###

HIRE PURCHASE STOCK A/C

Date Particulars Amt. Date Particulars Amt.
To Balance b/d *** By Hire Purchase Debtors A/c ***
To Shop Stock A/c *** By Goods Repossessed A/c ***
(Some time here Goods can be
HPP

repossessed but normally in H.P

Debtors A/c)
To Hire Purchases Adj. A/c *** By Balance c/d ***
### ###

Hire Purchases Adj. A/c is the Loading of the H.P Stock A/c

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HIRE PURCHASE DEBTORS A/C

Date Particulars Amt. Date Particulars Amt.
To Balance b/d *** By Cash A/c ***
To Hire Purchase Stock A/c *** By Goods Repossessed A/c (M.V) ***
By Hire Purchase Adj. A/c ***
By Balance c/d ***
### ###

HIRE PURCHASE ADJUSTMENT A/C

Date Particulars Amt. Date Particulars Amt.
To Stock Reserve A/c *** By Stock Reserve A/c ***
To Hire Purchase Debtors A/c *** By Hire Purchase Stock A/c ***
To Profit *** By Goods Repossessed A/c ***
(Profit on Sale)
### ###

GOODS REPOSSESSED A/C

Date Particulars Amt. Date Particulars Amt.
To Hire Purchase Debtors A/c *** By Bank (Sale) ***
To Bank A/c ***
To Hire Purchase Adjustment A/c ***
(Profit on Sale of Repossessed Goods)

### ###

PROBLEMS IN HIRE PURCHASE (SOME IMPORTANT POINTS)

1. When Rate of Interest is not given. (Calculation of Amount of Interest)

Problem: Cash Price of the Assets is Rs. 56,000, Hire Purchase price of the Assets is Rs. 60,000
payable in Rs. 15,000 Down and 3 Equal Installment of Rs. 15,000.
Calculate the Amount of Interest of each Installment.
Sol.: Calculation of Amount of Interest for each installment
Installment Amount Due Ratio Amount of Interest
I 45000 3 4000*3/6=2000
II 30000 2 4000*2/6=1333
III 15000 1 4000*1/6=667

2. When Cash Price is not given. (Calculation of Cash Price)

Problem: Hire Purchase price of the Assets is Rs. 5000 payable as Rs. 800 down and 3 Equal
Annual Installment of Rs. 1200, 2200 and Rs. 800 respectively, rate of interest is 10% pa.

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Sol.: Calculation of Cash Price.
Rate of Interest
Interest paid= Amt. Due+Installment Amt.
100+Rate of Interest

10
800 73
3. 110
CP=800-73=727

10
2200 727 2927 266
2. 110
CP=2200-266=1934

10
1200 1934 727 3861 351
1. 110
CP=1200-351=849
Total Cash Price=800+849+1934+727=Rs. 4310

Created by Azharuddin Khan under Guidance of Mr. Intakhab Ahmad (BVA)