Page 258 - Accountancy_F5

Required: Calculate the total cash price of the printer and interest paid with each
instalment.

Accounting entries for recording hire purchase transactions
Accounting for hire purchase transactions involves recording the acquisition of an asset,
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recognizing the corresponding liability, and subsequently accounting for interest and
periodic payments. The following is step-by-step guide on the accounting entries for
recording hire purchase transactions between parties:
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Accounting entries in the books of hire purchaser
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When the asset is purchased on hire purchase, it is assumed that the purchaser has full
intention of paying all the instalments. It is believed that hire purchase is just a method
of financing non-current assets. In this situation, on purchase of non-current assets, the
respective non-current asset account is debited with the total amount of cash price, and
the corresponding credit is given to hire vendor’s account. On the contrary, interest is
recognised and accounted for at the time when instalments become due by debiting the
interest account and crediting the hire vendor’s account.
For the purpose of accounting for initial cash down payment and annual instalments,
the hire vendor’s account is debited on the relevant date and crediting the bank/cash
account. The following are accounting entries in the books of hire purchaser.

S/N Transaction Accounting entries
1. When the asset is Dr Asset account xx
purchased on hire Cr Hire vendor account xx
purchase. With the total cash price of an asset purchased

2. For cash down Dr Hire Vendor account xx
payment. Cr Bank/cash account xx
With the amount of down payment paid
3. When the first Dr Interest account xx

instalment Cr. Hire vendor account xx
becomes due. With the amount of hire purchase interest accrued

4. When instalments Dr Hire vendor account xx
are paid. Cr Bank/cash account xx
With the amount instalment paid

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