4.1 Meaning & Introduction

If you buy your TV in cash, you pay, for example, Rs. 15,000. But if you want to pay in instalments of Rs, for example. You may need to pay 3,000 or Rs in 4 instalments each year. A total of 20,000. Extra amount of Rs. 3,000 are interested. If you choose the latter payment method, you will need to debit Rs. 5,000 to treat with interest in television as rated by Rs. 15,000 (not Rs. 20,000). For installment payments, there are two types of arrangements. Each installment may be treated as an "employment" in which the purchaser becomes the owner only if the purchaser has paid all the instalments. In other words, no property is passed to him, even if one installment remains unpaid. The seller reserves the right to take away the goods in case of default with respect to any installation. This is known as the "Hire Purchase" System.

Another arrangement may be that the property passes at the same time as the contract is signed. If the installment payment is not paid, the seller does not have the right to retrieve the item. His right is to sue the buyer for the amount to be paid. This is known as an Installment Payment System.

Definition: The Hire Purchase System is a system in which an employer (employee purchaser) purchases goods from a seller (employment vendor) but does not pay the full amount at one time. However, the down payment will be made in one lump sum and the balance will be paid in instalments by the employer. It's kind of like an installment plan, but the big difference between the installment plan and the hiring purchase plan is when the ownership is transferred.

Rental purchase systems are generally imposed on products with high resale value in the market. Therefore, if the job purchaser does not pay in instalments, the job vendor has the option of re-owning and reselling the asset in the market to recover costs and rates of return.

Parties involved in the employment purchase system

1. Hirer: In general terms, "Hirer" means the purchaser of an item, or the owner or person who acquires an item from a seller under an employment purchase system.

2. Rental Vendor: A "rental vendor" is the owner or seller of a product that delivers the product to the rental company based on the rental purchase system.

Formula

1. To calculate the Rental Purchase Price

2. How to calculate Cash Price Instalments

Hire Purchase Contract

The Employment Purchase Agreement contains conditions under which the Buyer and Seller mutually agree to hire the goods. This agreement contains the following terms:

The vendor or seller grants ownership of the goods to the employer or employment purchaser, provided that ownership is transferred only when the employer pays the final installment payment.

Hirer has the option to terminate the contract at any time if the asset is not needed or if additional instalments cannot be paid. Instalments paid by that date are considered rent to use the asset and the employer must return the asset to the vendor upon termination of the contract.

Contents of Employment Purchase Contract

According to the Employment Purchase Act of 1972 (Section 4), the Employment Purchase Agreement must include the following:

Benefits of Employment Purchasing System

Here are some of the benefits of a hiring purchase system:

Features of Hire Purchase System

Some of the related features of the Employment Purchasing System are:

Law: Regulated by the Employment Purchase Act of 1972.

Parties: This is an agreement between the employer and the hiring vendor to hire the asset.

Claims: If the employer fails to pay, the hiring vendor can only sue or claim the return of the property and not the remaining instalments.

Selling Rights: Hiler may not sell or mortgage the assets employed until the ownership is transferred.

Loss Bearer: The hiring vendor remains liable for the loss of the goods until ownership is transferred to the employer.

Key takeaways:

Calculation of Interest on Hire Purchase

Interest: In either case (employment purchase or installment payment), interest must be separated from the principal. Payments will continue for more than two fiscal years, so you will need to calculate the interest for each year separately. Information about cash prices and interest rates is usually available. This will make it easier to calculate interest. Simply set up one party's account on a regular line and charge interest on your unpaid balance. Suppose A purchases from machine B with a cash price of Rs on January 1, 2000. 15,000; Rs. 5,000 rupees will be paid at the time of signing the contract, and 4,000 rupees will be paid at the end of each year for three years. The interest rate is 10% per annum. If you create B's account (memo-based) in A's book, you'll see the annual interest.

Since this is the final year of instalments, the interest amount will be the difference between the outstanding balance and the actual instalments. [Students note that if they calculate last year's interest at a given percentage of the O / S amount (3700 x 10% = 370), the total payment will be (3700 + 370 = 4070), which is more than the installment payment. Please give me. Paid. So, there is Rs again. 70 will be paid even after the last installment has been paid.

If no interest rate is specified, the interest for each year is proportional to the amount unpaid for each year. In the above example, the total amount paid is Rs. 17,000 rupees 5,000 will be paid immediately. This leaves Rs. 12,000 unpaid in the first year and Rs at the end. 4,000 will be paid. In the second year Rs. 8,000 is outstanding and in the third year it is Rs. There is a deadline of 4,000. The total interest is rupees. 2,000. That is, Rs. 17,000. Minus Rs. 15,000. Interest must be allocated to the unpaid ratio, or Rs, over a three-year period. 12,000; Rs. 8,000 rupees 4,000 or 3: 2: 1 ratio. The interest in the first year is Rs.1,000, in the second year he is Rs.670, and in the third year he is Rs.333. Please note that the interest rate cannot be the same as the specified amount.

To check cash prices, interest rates and instalments. Cash prices may not be listed. Assets cannot be debited beyond the cash price and must be confirmed. The process is to first take last year and separate interest from principal from the total amount to be paid. In the above example, Rs. 4,000 will be paid at the end of 2002. The interest rate is 10%. If Rs.100 is paid at the beginning of 2001, Rs.10 will be added and Rs.110 will be paid at the end of 2002. Therefore, one eleventh of the total paid at the end of the year is interest. The rest are principals. In this way, we can proceed year by year.

Thus: —

Key takeaways:

Journal Entries in the books - Actual Cash Price Method

This method follows a technical approach and does not treat the employer as the owner until the final installment payment is paid. In this way, the asset is recorded at the actual cash price paid.

* Last year's interest is the same as the difference between the payment amount and the beginning balance. It is not calculated in the usual way.

Journal entry with Actual Cash Price Payment Method

Below are the various accounting entries in the books of hiring buyers and hiring vendors.

Note: Depreciation is charged on full cash price of the asset and Interest is calculated on total outstanding balance.

Key takeaways:

Disclosure in Balance Sheet - Actual Cash Price Method

At the end of each accounting period, the associated account appears on the balance sheet as follows:

Disclosure on the balance sheet based on the Actual Cash Price Payment Method

Key takeaways:

Hire Purchase in the Books of Vendor

Vendor Books: Vendors do not follow any special method for recording sales of rental purchases, especially when selling large items. He debits the buyer with the cash price and credits the amount received. Interest expense is debited each year. This is explained below.

Illustration-1

Calculate interest under the Employment Purchasing System based on the following details

(a) X & Co.-Buyer Y & Co. -Seller purchase date-January. January 1999

Cash price-Rs. 74,500.

Instalment payment Rs. 20,000 yen at the time of contract conclusion. Rest with 3 instalments of Rs. 20,000 each. Interest rate-5%. Depreciation of 10% of the decreasing balance.

(b) All details above, except that interest rates are not shown.

(c) All details similar to (a) above, except that the cash price is not shown.

Solution:

(b) Calculation of interest when the rate of interest is not given :

(c) Calculation of cash price, rate of interest being given:

Cash Price: 54,466 + cash down, Rs. 20,000 or Rs. 74,466.

Illustration-2

Y & Co. Sold a machine with a cash price of Rs. 74,500. X and Co. On a rental purchase basis on January 1, 2000. To. Payment was to be made as Rs. 20,000 down and rupees. 20,000 people every year for 3 years. The interest rate is 5%, Co. Charged depreciation at an annual rate of 10%. About the decrease in balance. Give a ledger account in a Y & Co book.

Key takeaways:

Hire Purchase in the Books of Purchaser

Buyer's Book — First Way. Buyers can also enter as if they were a regular asset purchase, according to the system adopted by the vendor. However, he should credit the seller with interest to be paid each year and debit him in cash when paid. The above example can be performed in the following way (ledger account): —

Students need to set up an account related to interest and depreciation.

The second method. In the second method, the entry is only passed when the payment is due or made. At this point, the vendor will be credited with the unpaid amount. Interest for a term is debited to the interest account and balance (principal) is debited to the asset account. Of course, at the time of payment, the vendor is debited and credited to cash (or bank). The two entries are:

1. Debit asset account, debit interest account, credit (employment) vendor

2. Debit (rental) vendor, credit cash, or (bank)

You need to charge depreciation according to the cash price of the asset

In the above example, the purchaser, X & Co. The journal entries and ledger accounts for the books are shown below.

Key takeaways:

Summary

Hire Purchase: No property is passed to him, even if one installment remains unpaid. The seller reserves the right to pick up the goods in the event of default on installment payments. This is known as the "Hire Purchase" system. Another arrangement may be that the property passes at the same time as the contract is signed. If the installment payment is not paid, the seller does not have the right to retrieve the item. His right is to sue the buyer for the amount to be paid. This is known as an installment payment system.

To check cash prices, interest rates and instalments. Cash prices may not be listed. Assets cannot be debited beyond the cash price and must be confirmed. The process is to first take last year and separate interest from principal from the total amount to be paid.

Bookkeeping: Actual Cash Price Payment Method: This method follows a technical approach and does not treat the employer as the owner until the final installment payment is paid. In this way, the asset is recorded at the actual cash price paid.

Vendor Book. Vendors do not follow any special method for recording sales of rental purchases, especially when selling large items. He debits the buyer with the cash price and credits the amount received. Interest expense is debited each year.

Buyer's Book

First Method

Buyers can also enter as if they were a regular asset purchase, according to the system adopted by the vendor. However, he should credit the seller with interest to be paid each year and debit him in cash when paid. The above example can be performed in the following way (ledger account): —

Second Method

In the second method, the entry is passed only when the payment is due or made. At this point, the vendor will be credited with the unpaid amount. Interest for a term is debited to the interest account and balance (principal) is debited to the asset account. Of course, at the time of payment, the vendor is debited and credited to cash (or bank).

Key takeaways:

References:

1. Gupta R.L. And Radha swamy. M, Sultan Chand & Sons, New Delhi.
2. Shukla M. C. Grewal T. S and Gupta S.C., S. Chand & Sons. New Delhi.
3. Shukla S. M., Sahitya Bhawan Publication, Agra.