Accounting Question And Answers - Hire Purchase Accounting
Question: Considering hire purchase accounting how do I record for hire purchase and its interest that I pay to the bank?
eg: if I have borrowed 100,000 through the hire purchase with 4% interest per annum for 5 years, how do I record it and the interest. what happens when i pay, where do i record?
Answer: Considering hire purchase accounting, we talk about assets which must be capitalised despite the ownership title to them will be transferred to the acquiring entity only after all the payment for the assets is made. Such payment is made within certain determined period of time.
In your example we have 100,000 hire purchase contract value for 5 years with 4% of annual interest rate. For the accounting purposes we need to capitalize asset and record liability to the seller:
D Asset 100,000
D Hire Purchase Interest Account (Asset) 100,000*0.04*5=20000
C Hire Purchase Liability Account 100,000+20,000=120,000
Assume that payments are being made on an annual basis, then after the end of the first year the following entry will be done
D Interest Expenses (Profit/Loss statement) 4000
C Hire Purchase Interest Account (Asset) 4000
D Hire Purchase Liability Account 100,000/5=20,000+4,000
C Cash 24,000
The same can be done on a monthly basis. At the end of 5 years there will be 0 values in hire purchase liability and interest accounts.
Take Your Accounting Skills to The Next Level
Accounting Basic Video Course - aimed for those who just start accounting learning. Video material with printable presentations, explanations and practical examples to gain accounting basic knowledge. Click here to learn more...
* * *
Intermediate Accounting Video Course - aimed for those who want to gain intermediate accounting knowledge. Video material with printable presentations, practical examples and comprehensive exercises with answers and solutions. Click here to learn more...
* * *
Accounting Skills In 30 Steps - combines stage 1 & 2 material (Basic Accounting and Intermediate Accounting). Video material with printable presentations, explanations, examples and comprehensive exercises with answers and solutions. Material includes additional bonuses. Click here to learn more...
* * *
Explore all our accounting learning material here...
