Journal Entries In The Books Of Hire Purchaser
There are two methods of recording hire purchase transactions in the books of the hire purchaser:
i. When the asset is recorded in full cash price-:full cash price method
ii. When the asset is recorded at cash price actually paid in each installment-: Actual cash price method.
1. For the purchase of asset:
First Method
Asset A/C (full cash price)...........Dr.
To vendor A/C
Second Method
No entry
2. For the payment made for 'down payment'
First Method
Vendor A/C.............Dr.
To bank A/C
Second Method
Asset A/C............Dr.
To Bank A/C
3. For installment due
First Method
Interest A/C............Dr.
To vendor A/C
Second Method
Asset A/C (part of cash value)............Dr.
To Interest A/C
4. For the payment of installment (both method)
Vendor A/C............Dr.
To Bank A/C
5. For charging depreciation( on the basis of cash value) (both methods)
Depreciation A/C...................Dr.
To Asset A/C
6. For transfer of interest and depreciation(both methods)
Profit and loss A/C............Dr.
To depreciation A/C
To interest A/C
Note: entries 3,4,5 and 6 will be repeated year after year until the final installment is paid.
Journal Entries In The Books Of Vendor
1. For selling goods on hire purchase
Hire purchase A/C...........Dr.(full cash price)
To sales/hire purchase sales A/C
2. For receiving down payment
Cash/bank A/C.................Dr.
To hire purchaser A/C
3. For installment due
Hire purchaser A/C............Dr.
To Interest A/C
4. For receiving the installment
Cash/bank A/C .............Dr.
To hire purchaser A/C
5. For transferring interest
Interest A/C............Dr.
To profit and loss A/C.
Note: * Depreciation will not charge by hire vendor.
* Entries 3,4 and 5 will be repeated year after year until the first installment is paid.
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