Accounting Records in the Books of Hire Purchaser and Vendor

In a hire purchase system, the hire purchaser (buyer) acquires an asset by paying an initial down payment followed by installments, with ownership transferring after the final payment. The asset is recorded at its full cost in the purchaser’s books, with a corresponding liability (Hire Vendor A/c). Interest on outstanding installments is recorded separately. Each installment paid reduces both interest and principal.

The vendor (seller) records the total sale value as revenue and recognizes interest income over the installment period. Payments received from the purchaser are recorded as part principal repayment and part interest income.

Ownership remains with the vendor until the final installment is paid, but for accounting purposes, the purchaser treats the asset as if owned from the start, depreciating it and recognizing any related expenses.

Example:

• A company (hire purchaser) buys machinery from a vendor under a hire purchase agreement.
• Cost of Machinery: ₹100,000
• Down Payment: ₹20,000
• Installments: 4 annual payments of ₹20,000 each (including interest).
• Interest Rate: 10% p.a. on outstanding balance.

Accounting Records:

Key Notes:

1. Hire Purchaser:

   • The asset is recorded at full value in the books, and ownership is assumed for accounting purposes, though legal title remains with the vendor until full payment.
   • Interest is charged on the outstanding balance and recorded separately from the principal.

2. Vendor (Seller):

   • The total sale amount is treated as revenue.
   • Interest income is recognized over the installment period.
   • The vendor records the receipts as installments are paid, including both principal and interest.