36513083 Hire Purchase Final Ppt(2)

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HIRE PURCHASE

Prepared By:

Jigar Dhuvad



Hire PurchaseHire Purchase

Hire purchase is used to buy expensive

items which a person cannot afford to pay

outright: e.g. a car

A down payment is usually paid and the balance is paid

over several months (monthly instalments).



DEFINITION

Goods are let out on finance by a financecompany to the hire purchasercustomer

Buyer is required to pay an equalamount of periodic installments duringa given period

Ownership transfers at the payment of

the last installment



Hire purchase - definition

• An agreement under which goods are let

on hire and under which the hirer has an

option to purchase them in accordancewith the terms of the agreement.



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What is hire purchase ?

Here possession of goods is transferredimmediately, but payment is made in

instalments. Ownership is transferred after all

the instalments have been paid.



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Terms of hire purchase

In hire purchase the purchase has to follow the

agreement and he cannot terminate thecontract. The seller can however, terminate the

agreement in case of default of purchaser

hire purchase price is higher than cash price, because interest element is added in this price



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A purchases a machine for down payment of

Rs. 20000 and 3 annual instalments of 20000

each. Cash price is 74500. show theaccounting ? Rate of interest 5%

74500 – 20000 = 54500

interest = 2725

amount due : 572252nd instalement 20000

amount due : 37225

interest = 1861 due = 39086

3rd instalment : 20000, balance : 19086

interst (belancing amt) : 914

last instalment 20000 balance = nil



Process of Hire Purchase

The Dealer, contracts with finance co. for financing hishire purchase deals.

The customer selects the goods for HP, and dealerarranges for the complete set of documents.

Down payment by customer on completion of proposal

form. Dealer sends documents to finance co. with request to

purchase the goods, and accept the HP transaction. The finance co. signs the agreement and sends copy

along with EMI details to dealer.

Dealer delivers the goods to the customer, propertypasses on to the finance co.. Hirer pays EMIs, and on last payment , the ownership

passes on to him, with loan completion certificate bythe finance co.



Hire purchase vs leasing• The hire has the option to

purchase the goods• Is a method of financing business

assets & consumer articles

• Depreciation & investment

allowance can be claimed•

• Only the interest is tax

component deductible

• Hirer enjoys the salvage value of

the asset

•

• In leasing the lessee has no

option to buy the goods• Is a method of financing

business assets only

•

• Depreciation & investment

allowance cannot be

claimed

• Entire lease rental is tax

deductible

• Lessee does not enjoy the

salvage value of the asset

•



• 20-25% deposit is required in

hire purchase

• In hire purchase we purchase

the goods

• The extent of finance is not

100% because of down

payment• Hirer bears the cost of

maintenance

•

• Asset is shown in b/s of thehirer

•

•

• No deposit is required in

leasing

• In leasing we rent the goods• The extent of finance is

100% as no down

payment required

• Maintenance cost is borne by the lessor except in

finance lease

• Leased assets are shown by

way of foot note only

•



Hire purchase



LEASING IN INDIALEASING IN INDIA

Only few major players exist

ü SREI International

Finance

üSundaram Finance

ü

üCholamandalam Finance

ü

üMahindra & Mahindra

üGE Capital

Present industry order

üShriram Finance

ü

üTata Finance

ü

üCountrywide Finance

üCiticorp



Many kinds of business asset are suitable for

financing using hire purchase or leasing,including:

- Plant and machinery

- Business cars- Commercial vehicles- Agricultural equipment..- Hotel equipment

- Medical and dental equipment- Computers, including software packages-Office equipment



GUIDELINES FOR BANKS AS FAR AS HIREPURCHASE BUSINESS IS CONCERNED

I. For the present, banks shall not themselves undertake

directly (i.e, departmentally) the business of hire

purchase

II. Banks which have set up subsidiaries (i.e, a company in

which it holds not less than 51% of the shares ) for

the business of equipment , leasing ,merchant

banking etc, may undertake the hire purchase

business either through such a subsidiary or through

a separate subsidiary.



Consumer Credit

Includes all asset based financing plansoffered to individuals. (eg. Cars,scooters,VCRs, TVs, Refrigerators,

washing machines etc., personalcomputers.).

Main supplier of consumer credit areMultinational Banks, commercialbanks, Finance cos..etc



Consumer Credit...

Salient Features Parties to the transaction : Bipartite

arrangement - two parties vizborrower/consumer and dealer/financier.Tripartite Transaction - dealer, financier, andcustomer. The dealer arranges the credit from thefinancier.

Structure of the transaction :

Hire-Purchase , Conditional Sale , Credit Sale . Hire Purchase - Most tripartite consumer credit

transactions are of this type. Customer option topurchase the asset on completion of the pay backperiod.



Consumer Credit ...

Conditional Sale : Ownership not transferred until fullpayment of purchase price, including the credit charge. The customer cannot terminate the agreement.

Credit Sale : Ownership transferred to the customer on

first instalment payment. But the agreement cannot becancelled.

Payment Period and ROI :

Payment period - 12 -60 months.

ROI - generally flat rate. Effective Rates generally notdisclosed. Sometimes in place of ROI, the EMI fordifferent payment periods is mentioned.



Consumer Credit ...

Security :

First charge on assets. The consumercannot sell the hypothecated asset.

Evaluation Can be made with Effective Rate of

Interest and rebates for early

repayments.



7/21/11

What entry is made on purchase

of an asset on hire purchase ?

Asset on hire purchase debit

to hire purchase vendor a/c credit (with the

cash price of assets)



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What entry is made on payment of

an asset purchased on hire

purchase ?

Hire vendor ac debit

to bank



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What entry is made on payment of

an asset purchased on hire

purchase ?

Interest on hire purchase debit

to hire vendor a/c credit



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What entry is made about

depreciation of an asset

purchased on hire purchase ?

Depreciation on asset a/c debit

to asset account credit

SECOND ENTRY

p & l a/c debitto depreciation credit



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What entry is made in the books

of vendor on hire purchase sale ?Hire purchaser a/cdebit

to hire purchase sale a/c credit (with the cash price of goods)

WHEN PAYMENT IS RECEIVED

bank a /c debit

to hire purchaser a/c credit

FOR INTERESThire purchaser debit

to interest on hire purchase sale a/c credit



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What is repossession ?

If hire purchaser doesnt pay instalments, the

vendor will take repossession of the assets.

There are two types of repossession :

1. full repossession

2. partial repossession



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What is the entry in the books of

purchaser on full repossession ?

Hire ventor a/c debit

to asset a/c (from the value of asset as per

accounts)



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What is the entry in the books of

vendor on full repossession ?

Goods repossession a/c debitto hire purchaser account credit

(a new account of goods repossession will be

opened)



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What is the accounting entry in

the case of partial repossession ?

In the case of full repossession, the hire

purchaser will close the account of ventor andvendor will close the account of purchaser. But

in case of partial repossession, the accouts will

remain open and the account will show balancefor remaining assets



THANK YOU

7/21/11

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36513083 Hire Purchase Final Ppt(2)

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