Accounting for Hire–

Purchase and Instalment

Payment System: 3 Methods
By
Amit Kumar Goel
Assistant Professor
 Accounting Method # 1. Assets Accrual Method:
Under this method, ownership of the asset depends on the payment made towards principal
(i.e., instalment less interest) and asset account will be debited by the amount of ‘Principal’,
since the ownership of the asset is not transferred from the seller to the buyer till the last
instalment is paid.
Therefore,
Journal Entriesownership
in the Booksof
of the asset will accrue with the instalment paid towards ‘Principal’.
Purchaser:

In the subsequent years (b),

(c), (d) and (e) with their
respective amounts will
appear in the books.
 Accounting Method # 2. Credit Purchase with Interest/Sales Method:
Under this method, asset account will be debited with the full amount of Cash Price of the
assets since the object of the hire-purchaser is to be the owner of the asset and, as a result,
the same should be treated like ‘credit purchase of an asset’ in the books of the hire-
purchaser.

In the subsequent years

(b), (c), (d) and (e) with
their respective amounts
will appear in the books.
 Journal Entries in the Books of the Vendor:

In the subsequent
years (c), (d) and (e)
with their respective
amounts will appear in
the books.
Accounting Method # 3. Interest Suspense Method:
This method is applicable in case of Instalment Payment System. Under this method, asset
account is debited with the full amount of Cash Price (like Sales Method stated above) and
Interest Suspense Account is opened which is debited at the time of taking delivery by the
total amount of interest paid for all the years and the same is credited by debiting Interest
Account in each subsequent year.
Journal Entries in the Books of Vendor:
Illustration 1:
On 1.1.1989, M/s Tallboy & Co. Ltd. took delivery from Plain Vans Ltd. of 5 Motor Vans on a Hire-
Purchase System. Rs. 2,000 being paid on delivery and the balance in five instalments of Rs. 3,000 each,
payable annually on 31st December. The vendor company charges 5% interest p.a. on yearly balances. The
cash value of 5 Motor Vans was Rs. 15,000.

Show Journal entries and the Vendor’s Account, Interest Account and the Motor
Vans Account in the books of M/s Tallboy & Co. Ltd. for five years under:

(i) Assets Accrual Method;

(ii) Credit Purchases with Interest Method; and
(iii) Interest Suspense Method.
Provide depreciation @ 20% on the Diminishing Balances. Adjust any difference in fifth
year’s account.