LECTURE NOTES FOR ADVANCE FINANCIAL
ACCOUNTING:
HIRE PURCHASE
Generally speaking suppliers of goods can sell their goods on different terms; (a) the goods can be sold
for outright cash, (b) they can be sold on credit terms of say one month, (c) the credit sales can be on
acceptance of a bill of exchange as a means of payment, (d) the goods can be sold on hire purchase
terms which is the subject we intend to consider here.
General Arrangements on Hire Purchase Transactions
As soon as the necessary agreements are signed, the hire purchase buyer takes possession of goods but
the legal title shall remain with the hire purchase seller until all the instalments are paid. From the
accounting perspective, the substance overrides the legal form; therefore the hire purchase buyer shall
capitalize the item bought on hire purchase as fixed asset if this satisfies the definition of fixed asset.
Usually the hire purchase price comprises of the cash selling price of the asset and hire purchase interest
(compensation for tying down the hire purchase seller’s fund), the amount to be capitalized as fixed asset
shall be the cash selling price while the hire purchase interest shall be expensed to the profit and loss
account over the hiring period.
The hire purchase seller shall account for the goods sold on hire purchase separately from other
forms of sales, thereby determining the gross profit on hire purchase sales. The gross profit includes the
difference between the cash selling price and cost of sales and hire purchase interest recognized as
received for the period.
We shall consider the required accounting transactions in the books of both the hire purchase
buyer and the hire purchase seller. Your knowledge of the lease transactions will be very useful as the
accounting transactions especially in the books of the hire purchase buyer look similar to that of the
lessee.
The Books of the Hire purchase Buyer
We have two methods of accounting for the hire purchase transactions as in the lessee books. We will
only consider one method due to time, space and the curriculum of our syllabus.
A) Method 1
Where the hire purchase interests payable are recorded at the commencement of the hire purchase
agreement;
The relevant accounting entries will be;
i) The cash selling price of the asset;
, Dr Fixed asset a/c
Cr Hire purchase seller a/c
ii) The total hire purchase interest payable;
Dr Hire purchase interest suspense
Cr Hire purchase seller’s a/c
iii) Deposits and instalments paid
Dr Hire purchase seller’s a/c
Cr Bank a/c
iv) Hire purchase interest expense for a period
Dr Hire purchase interest a/c
Cr Hire purchase interest suspense a/c
v) Hire purchase interest transferred to P & L account
Dr P & L account
Cr Hire purchase interest a/c
vi) Annual depreciation charge on the asset;
Dr P & L account
Cr Provision for depreciation a/c
We will look at an example in order to bring to the fore what we explained above
Illustration;
Dantulu Transport Limited entered into a hire purchase agreement with XY Finances Ltd for purchase of
two trailer vehicles on 1 January 2003. The hire purchase selling price of the vehicles is N193,725 and
the cash selling price is
N135, 000. An initial deposit of N45, 000 was made on that date to be followed by three annual
instalmental payments on 31 December 2003, 2004 and 2005 of N49, 500, N49, 500 and N49, 725
respectively. The depreciation policy of Dantulu Transport Limited is 20% per annum on straight line
method. The hire purchase interest implicit in the sale as used by XY Finance Ltd is 30% per annum
Required; post the required entries in the general ledger of Dantulu Transport Limited for all the periods
covered by the hire purchase transaction assuming that the total hire purchase interest payable is to be
ACCOUNTING:
HIRE PURCHASE
Generally speaking suppliers of goods can sell their goods on different terms; (a) the goods can be sold
for outright cash, (b) they can be sold on credit terms of say one month, (c) the credit sales can be on
acceptance of a bill of exchange as a means of payment, (d) the goods can be sold on hire purchase
terms which is the subject we intend to consider here.
General Arrangements on Hire Purchase Transactions
As soon as the necessary agreements are signed, the hire purchase buyer takes possession of goods but
the legal title shall remain with the hire purchase seller until all the instalments are paid. From the
accounting perspective, the substance overrides the legal form; therefore the hire purchase buyer shall
capitalize the item bought on hire purchase as fixed asset if this satisfies the definition of fixed asset.
Usually the hire purchase price comprises of the cash selling price of the asset and hire purchase interest
(compensation for tying down the hire purchase seller’s fund), the amount to be capitalized as fixed asset
shall be the cash selling price while the hire purchase interest shall be expensed to the profit and loss
account over the hiring period.
The hire purchase seller shall account for the goods sold on hire purchase separately from other
forms of sales, thereby determining the gross profit on hire purchase sales. The gross profit includes the
difference between the cash selling price and cost of sales and hire purchase interest recognized as
received for the period.
We shall consider the required accounting transactions in the books of both the hire purchase
buyer and the hire purchase seller. Your knowledge of the lease transactions will be very useful as the
accounting transactions especially in the books of the hire purchase buyer look similar to that of the
lessee.
The Books of the Hire purchase Buyer
We have two methods of accounting for the hire purchase transactions as in the lessee books. We will
only consider one method due to time, space and the curriculum of our syllabus.
A) Method 1
Where the hire purchase interests payable are recorded at the commencement of the hire purchase
agreement;
The relevant accounting entries will be;
i) The cash selling price of the asset;
, Dr Fixed asset a/c
Cr Hire purchase seller a/c
ii) The total hire purchase interest payable;
Dr Hire purchase interest suspense
Cr Hire purchase seller’s a/c
iii) Deposits and instalments paid
Dr Hire purchase seller’s a/c
Cr Bank a/c
iv) Hire purchase interest expense for a period
Dr Hire purchase interest a/c
Cr Hire purchase interest suspense a/c
v) Hire purchase interest transferred to P & L account
Dr P & L account
Cr Hire purchase interest a/c
vi) Annual depreciation charge on the asset;
Dr P & L account
Cr Provision for depreciation a/c
We will look at an example in order to bring to the fore what we explained above
Illustration;
Dantulu Transport Limited entered into a hire purchase agreement with XY Finances Ltd for purchase of
two trailer vehicles on 1 January 2003. The hire purchase selling price of the vehicles is N193,725 and
the cash selling price is
N135, 000. An initial deposit of N45, 000 was made on that date to be followed by three annual
instalmental payments on 31 December 2003, 2004 and 2005 of N49, 500, N49, 500 and N49, 725
respectively. The depreciation policy of Dantulu Transport Limited is 20% per annum on straight line
method. The hire purchase interest implicit in the sale as used by XY Finance Ltd is 30% per annum
Required; post the required entries in the general ledger of Dantulu Transport Limited for all the periods
covered by the hire purchase transaction assuming that the total hire purchase interest payable is to be
