by Preparation of Accounts under Hire Purchase
1. Important Accounts Prepared
- Hire Purchase Debtors Account
- Asset Account
- Hire Purchase Interest Account
- Vendor Account
- Cash/Bank Account
2. Journal Entries (When Asset is Recorded at Cash Price)
| Step | Transaction | Journal Entry |
|---|---|---|
| 1 | Asset purchased on hire purchase | Asset A/c Dr. To Hire Vendor A/c |
| 2 | Down payment made | Hire Vendor A/c Dr. To Cash/Bank A/c |
| 3 | When instalment becomes due | Hire Vendor A/c Dr. To Interest A/c |
| 4 | Instalment paid | Hire Vendor A/c Dr. To Cash/Bank A/c |
| 5 | Interest transferred to P and L | Interest A/c Dr. To Profit and Loss A/c |
| 6 | On default and repossession (partial) | Hire Vendor A/c Dr. To Asset A/c |
| 7 | On full repossession | Asset A/c Dr. To Hire Vendor A/c |
3. Simple Numerical Example
A machine is bought on hire purchase.
Cash Price: ₹1,00,000
Down Payment: ₹30,000
Remaining payable in 2 instalments with interest.
| Journal Entry | Amount |
|---|---|
| Machine A/c Dr. To Hire Vendor A/c | 1,00,000 |
| Hire Vendor A/c Dr. To Bank A/c | 30,000 |
| Hire Vendor A/c Dr. To Interest A/c | Interest amount |
| Hire Vendor A/c Dr. To Bank A/c | Instalment amount |
Preparation of Accounts under Instalment Payment System
1. Important Accounts Prepared
- Asset Account
- Vendor Account
- Interest Account
- Cash/Bank Account
2. Journal Entries (Ownership Transfers Immediately)
| Step | Transaction | Journal Entry |
|---|---|---|
| 1 | Asset purchased on instalment | Asset A/c Dr. To Vendor A/c |
| 2 | Down payment made | Vendor A/c Dr. To Cash/Bank A/c |
| 3 | Interest due on instalment | Interest A/c Dr. To Vendor A/c |
| 4 | Instalment paid | Vendor A/c Dr. To Cash/Bank A/c |
| 5 | Interest transferred to P and L | Profit and Loss A/c Dr. To Interest A/c |
3. Simple Numerical Example
Furniture purchased for ₹60,000, payable in instalments.
Down Payment: ₹20,000
Remaining with interest.
| Journal Entry | Amount |
|---|---|
| Furniture A/c Dr. To Vendor A/c | 60,000 |
| Vendor A/c Dr. To Bank A/c | 20,000 |
| Interest A/c Dr. To Vendor A/c | Interest amount |
| Vendor A/c Dr. To Bank A/c | Instalment amount |
