CHAPTER 12 - Hire Purchase Accounts

Abstract

This chapter discusses the three classifications of accounting: (1) the purchase of high-cost assets, (2) the sale of vehicles or machinery, and (3) the common retail selling on hire purchase terms. The hire purchase price is larger than that for immediate cash payment as it includes interest. The interest is the cost of financing the purchase in this way as it is not part of the cost of the asset. The interest charge in each profit & loss account must be the same as also must be the entries for the asset on the balance sheets. From the time of the acquisition of the asset, the charge for depreciation must be based on the full cash price. The major differences will arise because of the smaller value and greater number of transactions. The difficulty arises in the transfer of hire purchase interest to successive profit and loss accounts. It is impracticable to calculate the actual interest accruing for each transaction in each trading year.