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

 

1. Interest written to profit and loss

 

DR: Profit and loss account

 

CR: Hire purchase interest account

 

1. f. Depreciation on asset

 

DR: Profit and loss account

 

CR: Provision for depreciation account

 

 

 

FORMAT

 

1. Asset account CR

 

 

 

 

		N
Hire purchase creditor	xxx
Balance b/d	xxx

 

 

 

N

 

Balance c/d                                                                           xxx

 

 

 

1. 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. 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

 

 

 

 

 

 

 

 

 

 

 

1. 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 1^st 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 31^st 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 (3^rd Installment) 100, 000

 

31/12/2002 Balance c/d              90, 916

 

190, 916

 

31/12/2003 Bank (4^th 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:

 

1. On acquiring the asset

 

1. Asset account (with the Cash price)

 

1. Hire purchase interest suspense (with the full H P Price)

 

1. Creditors account (with the H P price)

 

1. Payment of initial deposit

 

 

 

 

 

1. Creditors account

 

1. CR. Bank account

 

1. Payment of installments

 

1. Creditors account

 

1. CR. Bank account

 

1. Interest element

 

1. Interest account

 

1. Hire purchase interest suspense account e. Interest written off

 

1. Profit and loss account

 

1. Hire purchase interest account

 

1. Depreciation of assets

 

1. Profit and Loss account

 

1. 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:

 

1. The amount expected to be paid by the hirer immediately under hire purchase is called A. Rent B. installment C. cost price D. deposit

 

2. 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.

 

3. Calculate the hire purchase price percentage. A. 65% B. 150% C. 115% D. 165%

 

4. If the cost price is N10, 000, the hire purchase price is A. N10, 000 B. N16, 500 C. N15, 000.

 

 

 

 

1. N20, 000

 

5. 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