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Chapter
Hire purchase accounting
Chapter eight: Hire purchase accounting
Eight
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Introduction
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Hire purchase system enables individuals to acquire valuable assets, such as cars
and appliances, by making instalment payments over time, allowing them to use the
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asset while still paying for it. In this chapter, you will learn meaning, nature and
terminologies of hire purchase accounts. Also, you will learn how to prepare and
maintain records related to hire purchase transactions. The competencies developed
will enable you to demonstrate an understanding of the concepts and principles
applied in the accounting of hire purchases and have ability to prepare and maintain
records related to hire purchases.
pay for the goods at a higher price than the
Hire purchase without keeping
records price that could be paid on outright cash
purchase to compensate the hire vendor for
Definition and nature of hire time value of money and risk on deferred
purchase agreements instalments. The hire purchaser will also be
Hire purchase is a method of purchasing required to make an initial payment (down
assets whereby the buyer (hire purchaser) payment) immediately after signing the
enters into an agreement with the seller (hire agreement, followed by a series of regular
vendor) for the exchange of assets by paying instalments for the identified period.
through a series of regular instalments. This Hire purchase system differs from the
system allows the seller to retain ownership outright purchase in several ways. Unlike the
of the sold assets until the final instalment is outright purchase system, in hire purchase,
paid. Hire purchase method is extensively ownership of the assets is not transferred to
applied in the acquisition of non-current the hire purchaser until the final instalment is
assets such as equipment, machinery, motor paid and the hire purchaser agrees. Outright
vehicle, and the like. purchase also involves a single payment for
The agreement between the hire purchaser the assets, while the hire purchase system
and the hire vendor is known as the hire is characterised by a series of instalments
purchase agreement. The hire purchase over an agreed period. Additionally, price
agreement requires the hire purchaser to paid by the hire purchaser is higher than
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