Hire Purchase Trading Account

The hire vendor is primarily concerned with the overall profitability of his all hire purchase sales transaction rather than the individual items. Under such circumstances, a simple method called Hire Purchase Trading Account method is adopted. For keeping the records of hire purchase transactions, a separate Hire Purchase Sales Book is maintained to record the following information:

(i)    Date of contract.

(ii)    Name of the hire purchaser (or simply hirer).

(iii)    Details of the goods sold.

(iv)    Cost price.

(v)    Hire purchase price.

(vi)    Amount of deposit (i.e., down payment).

(vii)    Number of Installments.

(viii)    Amount of each installments.

(ix)    Agreement No. and
 
(x)    General remarks. For calculating the profit or loss on hire purchase sales transaction, the following types of information should be extracted from the accounting records:

(a)    Cost price of the goods sold on hire purchase basis.

(b)    Total cash received from the hirers of hire purchase customers on account of down payments and the installments collected during the accounting period.

(c)    Total amount of installments due but not paid because of delay on the part of the hire purchase customers to make payment on due dates.

(d)    Total amount of installments not yet due; this is treated as the stock of goods lying with the customers.

(e)    And since the stock lying with customers is at hire purchase price, it is necessary to create appropriate stock reserve so that hire purchase price stock is converted into stock at cost price to the hire vendor.

It must be carefully noted that to keep a full record of the goods sold on hire purchase, it is necessary to have ledger accounts of the hire purchase customers showing the same details as if the goods have been actually sold; but these accounts are not part of the ordinary double entry system. The entries in the Hire Purchase Trading Account may be made either at cost to hire vendor or at hire purchase price as given below:

AT COST

(i)    For recording the opening balances of hire purchase stock with the customers at cost to hire vendor and installments due.

Debit: Hire Purchase Trading Account
Credit: Installments Not Due Account (At Cost)
Credit: Installment Due Account

(ii)    Hire Purchase sales of goods to hire purchaser (or hirers)

Debit: Hire Purchase Trading Account
Credit: Goods sold on Hire Purchase Account.

(a)   This entry is made with cost price of the goods sent to hire purchase customers. In this way no entry is made in the Hire Purchase Trading Account for (a) the opening stock at shop (b) purchases for goods to be sold on hire purchase and (c) closing balance of the stock at the shop.

(b)   At the same time, each customer’s (memorandum) account will be debited with the hire purchase price of the goods sold to each of them.

(iii)    On receipt of cash (Installment collected including down payments)

Debit: Cash/Bank Account
Credit: Hire Purchase Trading Account
Note: At the same time the customer’s (memorandum) account will be credited.
         Installments paid are n the nature of cash sales.

(iv)    On repossession of goods due to non-payment of installments due

Debit: Hire Sale Goods Returned (or Repossessed) Account
Credit: Hire Purchase Trading Account
Note: This entry is made in the hire purchase trading account at the revalued price of the          goods repossessed on customer’s default. However, customer’s (Memorandum) account     will be credited with the installments due and unpaid.

(v)    For installments due and unpaid at the end

Debit: Installments Due Account
Credit: Hire Purchase Trading Account
Note: The installments due but unpaid are in the nature of book debts and are therefore   treated as credit sale. They are carried down to the debt side of H.P. Trading Account in the next accounting period.

(vi)    For Installment not yet due at the end i.e., Stock Out on Hire at the end. At the balancing date this stock is valued at cost price. The entry is:

Debit: Hire Purchase Stock Account
Credit: Hire Purchase Trading Account
Note: This stock is carried down to the debit of Hire Purchase Trading Account in the next period.

(vii)    The difference on Hire Purchase Trading Account will now represent gross profit (when credit amount side exceeds the debit amount side) or loss (when debit amount total is more than credit amount total) to be transferred to (general) Profit and Loss Account.

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