SS3 First Term Financial Accounting Lesson Note – Hire Purchases and Installment Payment Accounts

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Week 3                                   

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:

1. Hire purchase and installment payment Accounts: -The system, preparation of Accounts in the (a) seller’s ledger and hirer’s ledger.
2. Goods account (c) Hire purchase Account and interest Account.

Definition

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:

1. Interest paid method
2. 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.

1. Asset acquired on hire purchase terms:

DR:      Hire purchase asset account

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