Hire Purchase Accounting Journal Entries
Hire Purchase Journal Entry. In a hire purchase agreement, an asset is acquired, but payment is made in installments. The buyer gets possession of the asset but doesn’t own it until the final installment is paid. There are various methods for accounting hire purchase transactions, but here’s a breakdown using two common methods: Cash Price Method and Interest Suspense Method.
1. Cash Price Method
In this method, the hire purchase is treated like any other purchase, and interest is recognized when it’s incurred. Below are the journal entries for both the buyer and vendor.
In the Books of Purchaser (Buyer)
| Date | Account Title | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 01-08-2024 | Asset on Hire Purchase Account | 1,00,000 | |
| 01-08-2024 | To Vendor Account | 1,00,000 | |
| For Down Payment Made to Vendor: | |||
| 01-08-2024 | Vendor Account | 30,000 | |
| 01-08-2024 | To Cash/Bank Account | 30,000 | |
| When Interest is Due on Unpaid Installments: | |||
| 01-09-2024 | Interest on Hire Purchase Account | 5,000 | |
| 01-09-2024 | To Vendor Account | 5,000 | |
| For Installment Payment (Including Interest): | |||
| 01-09-2024 | Vendor Account | 17,500 | |
| 01-09-2024 | To Cash/Bank Account | 17,500 | |
| For Transferring Interest to Profit & Loss Account: | |||
| 31-03-2025 | Profit & Loss Account | 5,000 | |
| 31-03-2025 | To Interest on Hire Purchase A/C | 5,000 | |
| For Depreciation Charged on Asset: | |||
| 31-03-2025 | Depreciation Account | 10,000 | |
| 31-03-2025 | To Asset on Hire Purchase A/C | 10,000 |
In the Books of Vendor (Seller)
| Date | Account Title | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 01-08-2024 | Hire Purchaser Account | 1,00,000 | |
| 01-08-2024 | To Hire Purchase Sales A/C | 1,00,000 | |
| For Down Payment Received: | |||
| 01-08-2024 | Bank Account | 30,000 | |
| 01-08-2024 | To Hire Purchaser Account | 30,000 | |
| For Interest Receivable: | |||
| 01-09-2024 | Hire Purchaser Account | 5,000 | |
| 01-09-2024 | To Interest Account | 5,000 | |
| For Installment Received: | |||
| 01-09-2024 | Bank Account | 17,500 | |
| 01-09-2024 | To Hire Purchaser Account | 17,500 |
2. Interest Suspense Method
In this method, an Interest Suspense Account is created, where the total interest for the hire purchase is transferred initially. As each installment becomes due, interest is charged to the Profit & Loss Account.
In the Books of Purchaser
| Date | Account Title | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 01-08-2024 | Interest Suspense Account | 20,000 | |
| 01-08-2024 | To Hire Purchase A/C | 20,000 | |
| When Interest Becomes Due: | |||
| 01-09-2024 | Interest Account | 5,000 | |
| 01-09-2024 | To Interest Suspense A/C | 5,000 |
Example with Additional Charges (Brokerage, Stamp Duty, etc.)
If brokerage, stamp duty, or service tax is paid during the hire purchase agreement:
| Date | Account Title | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 01-08-2024 | Asset Account | 2,000 | |
| 01-08-2024 | To Cash/Bank | 2,000 |