HIRE PURCHASE

Prepared By:
Jigar Dhuvad

Click to edit Master subtitle style

Hire Purchase

Hire purchase is used to buy expensive

items which a person cannot afford to pay
outright: e.g. a car

A down payment is usually paid and the balance is paid

over several months (monthly instalments).
DEFINITION
 Goods are let out on finance by a finance
company to the hire purchaser
customer
 Buyer is required to pay an equal
amount of periodic installments during
a given period
 Ownership transfers at the payment of
the last installment
 Hire purchase - definition
• An agreement under which goods are let
on hire and under which the hirer has an
option to purchase them in accordance
with the terms of the agreement.
 What is hire purchase ?

Here possession of goods is transferred

immediately, but payment is made in
instalments. Ownership is transferred after all
the instalments have been paid.

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 Terms of hire purchase

In hire purchase the purchase has to follow the

agreement and he cannot terminate the
contract. The seller can however, terminate the
agreement in case of default of purchaser
hire purchase price is higher than cash price,
because interest element is added in this price

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A purchases a machine for down payment of
Rs. 20000 and 3 annual instalments of 20000
each. Cash price is 74500. show the
accounting ? Rate of interest 5%
74500 – 20000 = 54500
interest = 2725
amount due : 57225
2nd instalement 20000
amount due : 37225
interest = 1861 due = 39086
3rd instalment : 20000, balance : 19086
interst (belancing amt) : 914
last instalment 20000 balance = nil

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Process of Hire Purchase
 The Dealer, contracts with finance co. for financing his
hire purchase deals.
 The customer selects the goods for HP, and dealer
arranges for the complete set of documents.
 Down payment by customer on completion of proposal
form.
 Dealer sends documents to finance co. with request to
purchase the goods, and accept the HP transaction.
 The finance co. signs the agreement and sends copy
along with EMI details to dealer.
 Dealer delivers the goods to the customer, property
passes on to the finance co..
 Hirer pays EMIs, and on last payment , the ownership
passes on to him, with loan completion certificate by
the finance co.
 Hire purchase vs leasing
• The hire has the option to • In leasing the lessee has no
purchase the goods option to buy the goods
• Is a method of financing business • Is a method of financing
assets & consumer articles business assets only
• Depreciation & investment •
allowance can be claimed • Depreciation & investment
• allowance cannot be
• Only the interest is tax claimed
component deductible • Entire lease rental is tax
• Hirer enjoys the salvage value of deductible
the asset • Lessee does not enjoy the
• salvage value of the asset
•
• 20-25% deposit is required in • No deposit is required in
hire purchase leasing
• In hire purchase we purchase • In leasing we rent the goods
the goods • The extent of finance is
• The extent of finance is not 100% as no down
100% because of down payment required
payment
• Maintenance cost is borne
• Hirer bears the cost of by the lessor except in
maintenance
finance lease
•
• Leased assets are shown by
• Asset is shown in b/s of the way of foot note only
hirer
•
•
•
Hire purchase
 LEASING IN INDIA
Present industry order

Only few major players exist

ü SREI International üShriram Finance

Finance ü
üTata Finance
üSundaram Finance
ü ü
üCholamandalam Finance üCountrywide Finance
ü
üMahindra & Mahindra
üCiticorp

üGE Capital
Many kinds of business asset are suitable for
financing using hire purchase or leasing,
including:

- Plant and machinery

- Business cars
- Commercial vehicles
- Agricultural equipment..
- Hotel equipment
- Medical and dental equipment
- Computers, including software packages
-Office equipment
  GUIDELINES FOR BANKS AS FAR AS HIRE
PURCHASE BUSINESS IS CONCERNED
I. For the present, banks shall not themselves undertake
directly (i.e, departmentally) the business of hire
purchase

II. Banks which have set up subsidiaries (i.e, a company in

which it holds not less than 51% of the shares ) for
the business of equipment , leasing ,merchant
banking etc, may undertake the hire purchase
business either through such a subsidiary or through
a separate subsidiary.
Consumer Credit
 Includes all asset based financing plans
offered to individuals. (eg. Cars,
scooters,VCRs, TVs, Refrigerators,
washing machines etc., personal
computers.).
 Main supplier of consumer credit are
Multinational Banks, commercial
banks, Finance cos..etc
Consumer Credit...
Salient Features
 Parties to the transaction : Bipartite
arrangement - two parties viz
borrower/consumer and dealer/financier.
Tripartite Transaction - dealer, financier, and
customer. The dealer arranges the credit from the
financier.
 Structure of the transaction :
 Hire-Purchase , Conditional Sale , Credit Sale .
 Hire Purchase - Most tripartite consumer credit
transactions are of this type. Customer option to
purchase the asset on completion of the pay back
period.
Consumer Credit ...
 Conditional Sale : Ownership not transferred until full
payment of purchase price, including the credit charge.
The customer cannot terminate the agreement.
 Credit Sale : Ownership transferred to the customer on
first instalment payment. But the agreement cannot be
cancelled.
 Payment Period and ROI :
 Payment period - 12 -60 months.
 ROI - generally flat rate. Effective Rates generally not
disclosed. Sometimes in place of ROI, the EMI for
different payment periods is mentioned.
Consumer Credit ...
 Security :
 First charge on assets. The consumer
cannot sell the hypothecated asset.
 Evaluation
 Can be made with Effective Rate of
Interest and rebates for early
repayments.
 What entry is made on purchase
of an asset on hire purchase ?

Asset on hire purchase debit

to hire purchase vendor a/c credit (with the
cash price of assets)

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What entry is made on payment of
an asset purchased on hire
purchase ?

Hire vendor ac debit

to bank

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What entry is made on payment of
an asset purchased on hire
purchase ?

Interest on hire purchase debit

to hire vendor a/c credit

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 What entry is made about
depreciation of an asset
purchased on hire purchase ?
Depreciation on asset a/c debit
to asset account credit
SECOND ENTRY
p & l a/c debit
to depreciation credit

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What entry is made in the books
of vendor on hire purchase sale ?
Hire purchaser a/cdebit
to hire purchase sale a/c credit (with the cash price of goods)
WHEN PAYMENT IS RECEIVED
bank a /c debit
to hire purchaser a/c credit
FOR INTEREST
hire purchaser debit
to interest on hire purchase sale a/c credit

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 What is repossession ?

If hire purchaser doesnt pay instalments, the

vendor will take repossession of the assets.
There are two types of repossession :
1. full repossession
2. partial repossession

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 What is the entry in the books of
purchaser on full repossession ?

Hire ventor a/c debit

to asset a/c (from the value of asset as per
accounts)

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 What is the entry in the books of
vendor on full repossession ?

Goods repossession a/c debit

to hire purchaser account credit
(a new account of goods repossession will be
opened)

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 What is the accounting entry in
the case of partial repossession ?

In the case of full repossession, the hire

purchaser will close the account of ventor and
vendor will close the account of purchaser. But
in case of partial repossession, the accouts will
remain open and the account will show balance
for remaining assets

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THANK YOU

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