Hire Purchase Accounting

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Could somebody explain this type of account, please, perhaps giving a graphic example? It's difficult to find information about it.<BR><BR>Thanks

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Hire Purchase Accounting

    Hi Simon<BR><BR>I think you mean Hire Purchase Account??, if so this is the methodology behind it.<BR><BR>Generally it involves the purchase of an asset (eg cars, plant and machinery, IT equipment etc). This is then paid for over the period of the agreement eg 3 years by monthly instalments would be 36 payments. So you may find a situation like this:<BR>Cost of asset: £20000 (DR Assets, CR Hire purchase loan)<BR>Over 36 installments of £638.89 per month. Total payable is £23,000.<BR><BR>Straight line approach: this means you simply allocate each payment as interest and capital, ie. capital being 1/36 of the cost and the interest to balance. Based on the above, monthly capital is 20000/36= £555.56 and interest is £83.33. Capital is used to reduce the balance of the hire purchase loan and the interest is an expense (DR HP loan 555.56, DR Interest Charge 83.33, CR Bank account £638.89).<BR><BR>After 36 months the balance on the hire purchase account will be nill ie. £20,000 less 36 capital payments of £555.56 (£20,000) = nil. Interest is released equally over the period of the finance.<BR><BR>There are other ways of allocation interest to payments (sum of digits, actuarial method etc) which I can iexplain if you need it.<BR><BR>Hope this has helped<BR>Ben
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Hire Purchase Accounting

    Much appreciated, Ben. <BR><BR>Simon

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