Hire Purchase SS3 Book Keeping Lesson Note

SPECIFIC OBJECTIVES: At the end of the lesson, pupils should be able to

1. Explain the meaning of hire purchase
2. List and explain some terminologies in hire purchase

HIRE PURCHASE

Hire purchase is a system of instalment 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 the hire purchase price, which is normally higher than the normal selling price of the item, this is a result of the hire purchase interest which is also referred to as the 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 instalments will be paid at regular intervals to liquidate the balance of the 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:

• Interest paid method
• Interest suspense method

 Interest paid method

 This is the most common and simplest method of treating hire purchase transactions. Using this method, the total amount to be paid on the asset is debited and then credited to the vendor account.

• Asset acquired on hire purchase terms: 

DR: Hire purchase asset account

CR: Hire purchase creditor account

•  Payment of initial deposit

DR: Hire purchase creditor account CR: Bank account

 Interest due at the date of instalment DR: Hire purchase interest account CR: Hire purchase creditor account

•  Instalment cash payment made.

 DR: Hire purchase creditor account CR: Bank account

• Interest written to profit and loss

 DR: Profit and loss account CR: Hire purchase interest account

•   Depreciation on asset

DR: Profit and loss account

CR: Provision for depreciation account

EVALUATION:    

1. Explain the meaning of hire purchase

1. List and explain some terminologies in hire purchase

CLASSWORK: As in evaluation

CONCLUSION: The teacher commends the students positively