Hire Purchase and Instalment Purchase System

Hire Purchase:

Meaning: 

It is a type of installment credit system that enables a customer to pay for a product or service in installments. The customer is the Hirer, and the vendor is the Hire Vendor.

Terms Used:

• Hirer: The customer who pays for the product or service in installments.
• Hire Vendor: The vendor who sells the product or service.
• Hire Purchase Agreement: A written agreement between the Hirer and Hire Vendor outlining the terms of the purchase.
• Hire Purchase Price: The total cost of the product or service, including any finance charges.
• Finance Charges: The fees associated with the hire purchase agreement, such as interest and administrative fees.

Features:

• The Hirer pays for the product or service in installments.
• The Hirer is the owner of the product or service once the purchase is complete.
• The Hirer has the right to use the product or service while the payments are being made.
• The Hire Vendor retains the title to the product or service until the purchase is complete.

Distinction Between Hire Purchase and Instalment Purchase Systems:

Hire Purchase

1. Hire purchase is a method of buying goods in which the buyer pays a deposit and then pays the remaining balance in regular installments.
2. The ownership of the goods is transferred to the buyer only after the final installment is paid.
3. The goods are owned by the financier until the full amount is paid.
4. The buyer can use the goods while paying off the installments.
5. The hire purchase agreement is a legal contract between the buyer and the financier.

Instalment Purchase

1. Instalment purchase is a method of buying goods in which the buyer pays the full purchase price in regular installments.
2. The ownership of the goods is transferred to the buyer as soon as the first installment is paid.
3. The goods are owned by the buyer from the start.
4. The buyer cannot use the goods until the full amount is paid.
5. The instalment purchase agreement is a legal contract between the buyer and the seller.

Accounting Treatment for Hire Purchase System:

The Hire Vendor records the transaction as a sale, debiting the sales account and crediting the accounts receivable account. The Hirer records the transaction as a purchase, debiting the accounts payable account and crediting the cost of goods sold account.

For High Value Goods:

The Hire Vendor records the transaction as a sale, debiting the sales account and crediting the accounts receivable account. The Hirer records the transaction as a loan, debiting the loan account and crediting the accounts payable account.

Books of Hire Purchaser and Hire Vendor:

The Hire Vendor’s books of account should include a sales account, an accounts receivable account and a loan account. The Hirer’s books of account should include a cost of goods sold account, an accounts payable account and a loan account.

Calculation of Interest:

The Hire Vendor must calculate the amount of interest to be charged to the Hirer based on the amount of the purchase, the length of the agreement and the interest rate.

Default and Repossession:

If the Hirer defaults on the agreement, the Hire Vendor can repossess the goods.

Types of Repossession:

There are two types of repossession: partial repossession and complete repossession.

Partial Repossession:

• This is when the lender reclaims a portion of the goods they have provided to the borrower. 
• This is usually done if the borrower has failed to make the required payments. 
• The lender may keep the goods, or return them to the borrower if they make the outstanding payments.

Complete Repossession: 

• This is when the lender reclaims all the goods that have been provided to the borrower. 
• This is usually done if the borrower has failed to make the required payments and the lender has no hope of the borrower being able to pay back their debt. 
• The lender may keep the goods, or return them to the borrower if they make the outstanding payments.

For Goods of Small Sale Value:

The Hire Vendor records the transaction as a sale, debiting the sales account and crediting the accounts receivable account. The Hirer records the transaction as a purchase, debiting the accounts payable account and crediting the cost of goods sold account.

Hire Purchase Trading Account:

This account is used to record the details of the hire purchase transaction, including the sale price, the finance charges and the total amount due.

Methods of Computation of Profit:

The Hire Vendor can calculate the profit on the hire purchase transaction by subtracting the cost of goods sold from the sale price.

Instalment Purchase System:

Meaning: 

It is a type of installment credit system that enables a customer to pay for a product or service in installments.

Accounting Treatment:

The Buyer records the transaction as a purchase, debiting the accounts payable account and crediting the cost of goods sold account. The Vendor records the transaction as a sale, debiting the sales account and crediting the accounts receivable account.

Books of Buyer and Vendor:

The Buyer’s books of account should include a cost of goods sold account, an accounts payable account and a loan account. The Vendor’s books of account should include a sales account, an accounts receivable account and a loan account.