HIRE PURCHASE AND INSTALMENT PAYMENT ACCOUNT
FIRST TERM SS 3
FINANCIAL ACCOUNTING
Week 3
Date———————
TOPIC: Hire purchases and Installment payment accounts: (i) Hire purchase and
Installment payment Accounts: -The system, Preparation of Accounts in the (a) seller’s ledger and hirer’s ledger. (b) Goods account (c) Hire purchase Account and interest Account.
CONTENT: (i) Hire purchase and installment payment Accounts: -The system,
preparation of Accounts in the (a) seller’s ledger and hirer’s ledger.
(ii) Goods account (c) Hire purchase Account and interest Account.
Definition:
Hire purchase and installment payment accounts are specialized financial arrangements that allow consumers to obtain goods or services on a temporary basis, with the option to buy them at a later date. These types of accounts typically involve financing agreements between the consumer and a lender, with payments made in installments over time. In order to prepare these types of accounts, the seller’s ledger, hirer’s ledger, goods account, and interest account must all be carefully maintained and tracked. Additionally, these accounts may require the use of specialized financial software or other tools for proper accounting purposes.
Hire purchase is a system of installment payment whereby the buyer or hirer has possession and use of the goods while the owner retains the ownership of goods until the final payment has been made. The amount paid for the goods is called hire purchase price, which is normally higher than the normal selling price of the item, this is as a result of the hire purchase interest which is also referred to as finance charge.
A deposit i.e. the initial sum is paid by the hirer at the inception of the hire purchase transaction after which other installments will be paid at regular intervals to liquidate the balance of hire purchase price at the end of the hire period.
Accounting entries
The accounting entries shall be considered looking at the two parties to hire purchase transaction, i.e. the seller and the hirer (buyer).
Buyer’s books
There are two basic methods of preparing hire purchase transactions in the buyer’s books:
i. Interest paid method
ii. Interest suspense method
Interest paid method
This is the commonest and simplest method of treating hire purchase transaction. Using this method, the total amount to be paid on the asset is debited and then credited to the vendor account.
a. Asset acquired on hire purchase terms: DR: Hire purchase asset account CR: Hire purchase creditor account
b. Payment of initial deposit
DR: Hire purchase creditor account
CR: Bank account
c. Interest due at the date of installment
DR: Hire purchase interest account
CR: Hire purchase creditor account
d. Installment cash payment made
DR: Hire purchase creditor account
CR: Bank account
- Interest written to profit and loss
DR: Profit and loss account
CR: Hire purchase interest account
- f. Depreciation on asset
DR: Profit and loss account
CR: Provision for depreciation account
FORMAT
- Asset account CR
| N | ||
| Hire purchase creditor | xxx | |
| Balance b/d | xxx | |
N
Balance c/d xxx
- Hire purchase creditor account CR
N
N
| Year 1 Bank(Deposit) | xxx | |
| Bank (Installment) | xxx | |
| Balance c/d | xxx | |
| Year 2 Bank (installment) | xxx | |
| Balance c/d | xxx | |
| xxx | ||
| Year 3 Bank (installment) | xxx | |
xxx
| Year 1 Asset | xxx | |
| Interest | xxx | |
| xxx | ||
| Year 2 Balance b/d | xxx | |
| Interest | xxx | |
| xxx | ||
| Year 3 Balance b/d | xxx | |
| Interest | xxx | |
| xxx | ||
- Interest account CR
| N | |
| Year 1 H P Creditor | xxx |
| Year 2 H P Creditor | xxx |
| Year 3 H P Creditor | xxx |
| xxx |
| N | ||
| Year 1 | Profit and loss | xxx |
| Year 2 | Profit and loss | xxx |
| Year 3 Profit and loss | xxx | |
| xxx | ||
- Provision for depreciation account CR
N
Balance c/d xxx
Balance c/d xxx
xxx
| N | |||
| Profit and loss | xxsx | ||
| Balance b/d | xxx | ||
| Profit and loss | xxx | ||
| xxx | |||
Illustration 1.
MallamTanko purchased a trailer lorry on 1st January 2010 from IkehchukwuOkeke on hire purchase terms, under which MallamTanko paid a deposit of N123,010 to be followed by four annual installments of N100,000 each payable on 31st December. Interest is charged on outstanding balance at 10% per annum. The cash price of the equipment is N440, 000.
Depreciation on the equipment is at 20% per annum on straight line basis. All the sums due were paid on due dates.
Show the relevant ledger entries in the books of MallamTanko.
| Solution | |||||||||
| Workings (i) | |||||||||
| Calculation of Hire purchase interest | N | H P interest | |||||||
| N | |||||||||
| 1/1/2010 | Cash price | 440,000 | |||||||
| 1/1/2010 | Deposit | (123,010) | |||||||
| 316,990 | |||||||||
| 31/12/2010 | Interest (N316, 990 x 10%) | 31,700 | 31,700 | ||||||
| 348,690 | |||||||||
| 31/12/2010 | 1st installment | (100,000) | |||||||
| 248,690 | |||||||||
| 31/12/2001 | Interest (N248, 690 x 10%) | 24, 870 | 24, | ||||||
| 870 | 273, 560 | ||||||||
| 31/12/2001 | 2nd Installment | (100, 000) | |||||||
| 173, 560 | |||||||||
| 31/12/2002 | Interest (N173, 560 x 10%) | 17, 356 | 17, | ||||||
| 356 | 190, 916 | ||||||||
| 31/12/2002 | 3rd Installment | (100, 000) | |||||||
| 90, | 916 | |||||
| 31/12/2003 | Interest (N90, 916 x 10%) | 9,084* | 9, 084 | |||
| 100, | 000 | |||||
| 31/12/2003 | 4th Installment | (N100, 000)83, 010 | ||||
- The figure is as a result of previous approximation.
Working 2. Calculation of Hire purchase price
| N | |
| Initial deposit paid on 1/1/2000 | 123, 010 |
| Installments (N100, 000 x 4) | 400, 000 |
| 523, 000 | |
Ledger accounts
Hire purchase Creditor ( MallamTanko)
| N | |
| 1/1/2000 Bank (Deposit) | 123, 010 |
| 31/12/2000 Bank (1st Installment) | 100, 000 |
| 31/12/2000 Balance c/d | 248, 690 |
| 471, 700 | |
| 31/12/2001 Bank (2nd Installment) | 100, 000 |
| 31/12/2001 Balance c/d | 173, 560 |
273, 560
31/12/2002 Bank (3rd Installment) 100, 000
31/12/2002 Balance c/d 90, 916
190, 916
31/12/2003 Bank (4th Installment) 100, 000
100, 000
| N | ||
| 1/1/2000 Hire purchase Lorry | 440, 000 | |
| 31/12/2000 H P Interest | 31, 700 | |
| 471, 700 | |||
| 1/1/2001 Balance b/d | 248,690 | ||
| 31/12/ H P Interest | 24, 870 | ||
| 273, 560 | |||
| 1/1/2002 Balance b/d | 173, 560 | ||
| 31/12/2002 H P Interest | 17, 356 | ||
| 190, 916 | |||
| 1/1/2003 Balance b/d | 90, 916 | ||
| 31/12/2003 H P Interest | 9, 084 | ||
| 100, 000 | |||
Hire purchase Interest Account
| N | ||
| 31/12/2000 H P Creditor | 31, 700 | |
| 31/12/2001 H P Creditor | 24, 870 | |
| 31/12/2002 H P Creditor | 17, | 356 |
| 31/12/2003 H P Creditor | 9, | 084 |
| N | |
| 31/12/2000 Profit & Loss a/c | 31, 700 |
| 31/12/2001 Profit & Loss a/c | 24, 870 |
| 31/12/2002 Profit & Loss a/c | 17, 356 |
| 31/12/2003 Profit & Loss a/c | 9, 084 |
Hire purchase Lorry account
| N | |||||
| 1/1/2000 H P Creditor | 440, 000 | ||||
| 1/1/2001 Balance b/d | 440, 000 | ||||
| 1/1/2002 Balance b/d | 440, 000 | ||||
| 1/1/2003 Balance b/d | 440, 000 | ||||
| 1/1/2004 Balance b/d | 400, 000 | ||||
| N | |
| 1/1/2000 Balance b/d | 440, 000 |
| 1/1/2001 Balance b/d | 440, 000 |
| 1/1/2002 Balance b/d | 440, 000 |
| 1/1/2003 Balance b/d | 440, 000 |
Provision for Depreciation account
| N | |||
| 31/12/2000 Balance c/d | 88, | 000 | |
| 31/12/2001 Balance c/d | 176, | 000 | |
| 176, 000 | |
| 31/12/2002 Balance c/d | 264,000 |
| 264, 000 | |
| 31/12/2003 Balance b/d | 352, 000 |
352, 000
| N | ||
| 31/12/2000 P & L a/c | 88, 000 | |
| 1/1/2001 Balance b/d | 88, 000 | |
| 31/12/2001 P & L a/c | 88, 000 | |
| 176, 000 | ||
| 1/1/2002 Balance b/d | 176, 000 | |
| 31/12/2002 P & L | 88, 000 | |
| 264, 000 | ||
| 1/1/2003 Balance b/d | 264, 000 | |
| 31/12/2003 P & L | 88, 000 | |
| 352, 000 | ||
| 1/1/2004 Balance b/d | 352, 000 | |
Interest Suspense Method
This is the second method of dealing with hire purchase transactions. When this method is employed, these are the accounting entries:
- On acquiring the asset
- Asset account (with the Cash price)
- Hire purchase interest suspense (with the full H P Price)
- Creditors account (with the H P price)
- Payment of initial deposit
- Creditors account
- CR. Bank account
- Payment of installments
- Creditors account
- CR. Bank account
- Interest element
- Interest account
- Hire purchase interest suspense account e. Interest written off
- Profit and loss account
- Hire purchase interest account
- Depreciation of assets
- Profit and Loss account
- Provision for depreciation account
Illustration 2.
Using illustration 1 above.
Hire purchase Creditor ( MalamTanko) account
| N | ||
| 1/1/2000 Bank (Deposit) | 123,010 | |
| 31/12/2000 Bank (1st Installment) | 100, 000 | |
| 31/12/2000 Balance c/d | 300, 000 | |
| 523,010 | ||
| N | ||
| 1/1/2000 H P Lorry | 440, | 000 |
| 1/1/2000 H P Interest suspense | 83, | 010 |
523, 010
| 31/12/2001 Bank (2nd installment) | 100, 000 | |
| 31/12/2001 Balance c/d | 200, 000 | |
| 300, 000 | ||
| 31/12/2002 Bank (3rd Installment) | 100, 000 | |
| 31/12/2002 Balance c/d | 100, 000 | |
| 200, 000 | ||
| 31/12/2003 Bank (4th Installment) | 100,000 | |
| 1/1/2001 Balance b/d | 300, 000 |
| 300, 000 | |
| 1/1/2002 Balance b/d | 200, 000 |
| 200, 000 | |
| 1/1/2003 Balance b/d | 100, 000 |
Hire Purchase Interest Suspense account
N
1/1/12000 H P Creditor 83, 010
| 83, 010 | |
| 1/1/2001 Balance b/d | 51, 310 |
| 51, 310 | |
| 1/1/2002 Balance b/d | 26, 440 |
| 26, | 440 | |
| 1/1/2003 Balance b/d | 9, | 084 |
| N | ||||
| 31/12/2000 H P Interest | 31, 700 | |||
| 31/12/2000 Balance c/d | 51, | |||
| 310 | ||||
| 83, 010 | ||||
| 31/12/2001 H P Interest | 24, 870 | |||
| 31/12/2001 Balance c/d | 26, | |||
| 440 | ||||
| 51, 310 | ||||
| 31/12/2002 H P Interest | 17, 356 | |||
| 31/12/2002 Balance | 9, 084 | |||
| 26, 440 | ||||
| 31/12/2003 H P Interest | 9, 084 | |||
Hire purchase Interest Account
| N | |
| 31/12/2000 H P Interest suspense | 31, 700 |
| 31/12/2001 H P Interest suspense | 24, 870 |
| 1/12/2002H P Interest suspense | 17, 356 |
| 31/12/2003 H P Interest suspense | 9, 084 |
| N | ||
| 31/12/2000 P & L A/c | 31,700 | |
| 31/12/2000 P & L A/c | 24, 870 | |
| 31/12/2000 | P & L A/c | 17, 356 |
| 31/12/2000 | P & L A/c | 9, 084 |
It is not necessary to prepare H P Lorry account and the provision for depreciation account, because it remains the same as in the interest payable method.
EVALUATION
From Essential Financial Accounting For Senior Secondary Schools by O.A. Longe& R.A. Kazeem, prepare solution to Question 5 on page 338 of Chapter 31.
GENERAL EVALUATION
Objective Test:
- The amount expected to be paid by the hirer immediately under hire purchase is called A. Rent B. installment C. cost price D. deposit
- A finance company stands as—————- under hire purchase transaction between the sellers and the hirer. A. buyer B. guarantor C. seller D. owner
Use this information to answer questions 3 to 5. The cash price is 50% above the cost price while the financing charge is 15% on the cost price.
- Calculate the hire purchase price percentage. A. 65% B. 150% C. 115% D. 165%
- If the cost price is N10, 000, the hire purchase price is A. N10, 000 B. N16, 500 C. N15, 000.
- N20, 000
- The service charge is A. N1, 500 B. N5, 000 C.N2, 475 D.N2, 250
ESSAY: From Simplified and Amplified Book Keeping & Accounting for Senior Secondary Schools 1, 2, 3 by Femi Longe, solve Exercise 1x, 2 and 5x on pages 533 and 534.
WEEKEND ASSIGNMENT: From Essential Financial Accounting for Senior Secondary Schools 1, 2, and 3 by Femi Longe