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A purchase system in which the purchaser pays the price for the commodities he has to buy or has bought in instalments (which can be annual, quarterly, monthly etc.) is known as the hire purchase system. According to this system, the delivery of the goods to the purchaser is done at the time of the agreement before the instalments but the title for the items is transferred to the purchaser only after the full payment of all the instalments which were earlier stated in the agreement of the hire purchase. Hire purchase has a special feature which states that each instalment which is supposed to be paid for acquiring the item is treated as a payment for the hire charges from the purchaser towards the hire vendor until the last instalment payment is done. For performing accounting for hire purchase there are certain things which should be known as a precursor for the upcoming process such as- the price which is supposed to be paid if any item is purchased on cash without instalment is known as the cash price, the summation of cash price and interest for risk of giving asset on instalment is known as the hire price, the payment which is done at the beginning of the deal for the hire purchase is known as the down payment. There are various methods for the process of accounting for hire purchase which would be discussed in the following section of Accounting for Hire Purchase Homework Help.
Methods of Accounting for Hire Purchase
There are mainly two accounting methods for hire purchase. The methods of accounting for hire purchase explained in Accounting for Hire Purchase Homework Help are given below
• Asset accrual method- According to this method, the asset is owned by the hire purchaser up to the value of the cash price which is paid by the purchaser in the form of down payment which is included in the instalments. The sequential steps which are followed are- taking the delivery of the asset, making the down payment, instalment due, payment of instalment, charging depreciation, transfer of interest. Students who want to excel in accounting for hire purchase can refer Accounting for Hire Purchase Homework Help, where our experts have shared their knowledge.
• Total asset value method- According to this method, the accounting is performed on the assumption that the ownership of the asset is given to the purchaser only delivery of the goods. The following steps mentioned in Accounting for Hire Purchase Homework Help are performed for the process- taking the delivery of the assets at the time of agreement, making the down payment, due instalment, payment of instalment, charging the depreciation, transfer of interest and depreciation to p/l a/c.
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