BCOM 1st Year Hire Purchase And Instalment Purchase System Long Notes
BCOM 1st Year Hire Purchase And Instalment Purchase System Long Notes :- You will get full Information related to BCOM All Study Material Question Answers Notes Unit Wise Chapter Wise Syllabus Of the Content Topic Wise Notes Meaning of hire purchase contract, Legal provision Regrading Hire purchase Contract, Accounting records for goods of substantial sale values and accounting records for goods of small values, Instalment Purchase System, After sales service All topic content In over site parultech.com.
LONG ANSWER QUESTIONS
Q.1. Define hire-purchase system. Discuss the important terms and contents of hire-purchase agreements.
Ans. Hire-purchase System: Refer to Sec-A, Q.1.
To understand this hire-purchase system properly, the following terms should be understood prior, we proceed further:
1. Hirer: A ‘hirer’ means a person who obtains or has obtained possession of the goods from an owner under a hire-purchase agreement.
2. Owner or Hire-vendor : Hire-vendor means a person who delivers or has delivered the possession of goods to the hirer under a hire-purchase agreement.
3. Down Payment or Option Amount or Initial Payment: All the terms denote the same meaning that the sum of money paid by the hirer at the time of taking possession of the property (goods), 1.0.0 the time of entering into a hire-purchase agreement.
4. Hire: It means the sum payable periodically by the hirer under a hire-purchase agreement.
5. Cash Price: It means the total price payable at the time of purchase. It is composed of costo owner plus profit margin.
6. Net Cash Price: It means the cash price of the goods comprised in a hire-purchase agree less any deposit.
7. Cash Price Instalment: Cash price instalment = Net cash price Hire-purchase instalment 8. Hire-purchase Price: It can be understood easily in the form of equation.
9. Hire-purchased Charges: It means the difference between hire-purchase ed in hire-purchase agreement.
10. Hire-purchase Agreement: It includes an agreement under which,
(a) Possession of goods is delivered by the owner to a person who pays the agreed amount in periodical installation.
(b) the property in goods is to pass to such a person on payment. Such a person on payment. Such a person has the right to terminate the agreement at any time before the property so passe.
(c) such person has right to terminate the agreement at any time beto cerminate the agreement at any time before the property so passes.
Contents of Hire-purchase Agreement
As per Section 4 of the Hire-purchase Act, 1972, every hire-purchase agreement should have the following contents :
1. The hire-purchase price of the goods.
2. The cash price of goods.
3. The date of commencement of agreement.
4. The Number of instalments by which the hire-purchase is to be paid, the amount of each of those instalment, the date upon which it is payable, the person to whom and the place where it is payale.
Q.2. Explain the difference between hire-purchase system and instalment payment system. Under instalment payment system, which accounts are prepared in the books of buyer and seller? (2014)
Ans. Difference between Hire-purchase and Instalment Payment Systems
Though hire-purchase system and instalment payment systems seem similar as they both involve periodical payments to the vendor, but they are fundamentally different. The main points of difference between the two systems are as follows:
(A) Legal Differences
1. Nature of Contract: Hire-purchase system is an agreement of hiring whereas instalment payment system is an agreement of sale.
2. Property in Goods: Under hire-purchase system, the property in the goods remains vested in the seller until the last instalment has been paid off whereas under instalment payment system, the property in the goods passes to the buyer immediately on signing the agreement of sale.
3. Bailee: Under hire-purchase system, the purchaser is a bailee but under instalment system, the purchaser is the owner from the very beginning.
4. Right of Return of Goods: Under hire-purchase system, the buyer can return the goods to the vendor if he does not want to pay rest of the instalments but under instalment payment system, goods cannot be returned unless some default has been committed by the seller.
5. Right of Disposal of Goods: Under hire-purchase system, the buyer cannot dispose off the goods, unless the last instalment is paid but under instalment payment system, he can do so.
6. Good Title: Under hire-purchase system, the buyer cannot give good title to others before the last instalment is paid but under instalment system, the purchaser can give good title to any bonafide purchaser.
7. Right of Repossession of Goods: Under hire-purchase system, the seller has the right to woods if the buyer makes default in payment of any instalment but under instalment le seller cannot repossess the goods but he can only sue for the unpaid balance.
8. Realisation of Outstanding Instalments: Under hire-purchase system, on default by the purchaser, the vendor has the right to claim for the ander has the right to claim for the recovery of outstanding balances besides the right of repossession of goods but under instalment system, the seller can the seller can only sue for the recovery of outstanding instalments.
9. Repair of the Goods: Under hire-purchase system, till the final instalment is realised, the selle takes the responsibility of repair of the article sold because till then, he is the real owner but unda Instalment system, unless a clear contract is made, the seller is not liable for the repair of the goods
10. Risk: Under hire-purchase system, until the last instalment is paid, loss occurring to goods ha to be borne by the seller, if the buyer has taken reasonable care of the goods expected from a bailee but under instalment payment system, any such loss will be borne by the buyer.
(B) Accounting Differences
1. In the Books of the Buyer
(a) Accounting Method: Under hire-purchase system, entries can be made by either asset accrual method or credit purchase method but under instalment payment system, usually interest suspense method is adopted.
(b) Balance Sheet: Under hire-purchase system, amount outstanding at the end of the year is shown in the buyer’s balance sheet as deduction from the hire-purchase asset on the asset side whereas under intalment payment system, amount outstanding to vendor is shown on the liabilities side of the balance sheet after deducting from it, the balance of Interest Suspense Account.
2. In the Books of the Seller
(a) Entry of Goods Sold: When goods are sold on hire-purchase, ‘Hire-sales account is credited with the cash value of the goods sold but when goods are sold on instalment payment system, ‘Sales account is credited.
(b) Outstanding Balances: Under the hire-purchase system, instalments outstanding and not due at the end of an accounting period are regarded as ‘stock’ whereas under instalment system, they are regarded as ‘debtors’.
(c) Provision for Bad Debts: Under instalment payment system, it is essential to make adequate provision for bad debts resulting from non-payment of future instalment whereas under hirepurchase system, no such provision is required as here the seller can repossess the goods in case of default.
Accounts Prepared in the Books of Buyer under Instalment Payment System: The accounts prepared in the books of buyer under instalment payment system are as follows:
1. Assets account.
2. Vendor account.
3. Interest suspense account.
4. Interest account.
Accounts Prepared in the Books of Purchaser under Instalment Payment System: The accounts prepared in the books of purchaser under instalment payment system is as follows:
1. Purchaser account.
2. Interest suspense account.
3. Interest account.
Q.3. What is hire-purchase system? Mention the entries necessary in the books of buyer as well as seller when goods are sold on hire-purchase system. (2016)
Or Mention the journal entries necessary in the books of the hire-purchaser as well as the hirevendor under hire-purchase system.
Ans. Hire-purchase System: Refer to Section-A, Q.1.
Accounting Treatment in the Books of Hirer-purchaser
Books of buyer or hirer-purchaser legally speaking the hire-purchaser may not be treated as the owner of goods purchased till the last due (instalment) is paid by him. But in accounting treatment this view is ignored and the hire-purchase is treated as other ordinary transaction. Only accountants emphasise is to add the term ‘Hire-purchase’ to assets purchased under system, to distinguish from the assets purchased by full payment of cash.
There are two methods of recording transactions in the book of buyer or hirer-purchaser:
First Method: The asset account is debited with the cash price included in each instalment. The down payment is fully towards cash price (the main drawback of this method is t near in the balance sheet at proper value).
Second Method: At the time of signing contract, the asset account
me of signing contract, the asset account is debited with total cash transaction, accounting treatment is more or less similar.
Under the first method, vendor’s account shows nil balance after every payment.
Whereas under the second method the vendor’s account will be a running account and nil only after last payment.
The accounting entries are shown for both the methods in tabular form as given below
1. Whenever instalment amount becomes due, transactions, 3, 4.5 and 6 are to be repeated.
2. In case instalments are not annual, then 5 and 6 are to be recorded once, i.e. at the time of closing book.
3. However in this book, only the second method is used most widely. The first method here is discussed purely from academic interest only as far as this book is concerned.
4. Regarding depreciation, students are asked to provide depreciation on the assets purchased under hire-purchase system in the same way as other assets bought for ‘Cash or Credit’ (ignore the controversy on depreciation whether depreciation is to be charged or not). As such, depreciation must be provided on full cash price.