Accounting in the books of Hire-vendor

Hire Vendor: There is only one method of recording the entries in the books of hire-vendor. Irrespective of the fact whether the entries in the books of hire-purchaser are passed under the Asset Accrual Method or under the Total asset value Method.But the accounting entries in the books of hire-vendor are always passed under the total Asset Method. These entries are as under:-

(i)On delivery of goods to the hire-purchaser at the time of agreement:

Hire – purchaser A/c Dr. Cash Price

To Hire – Sales A/c.

(ii)On receipt of cash at the time of agreement (down payment), if any:

Cash/Bank A/c. Dr. (Amt. of down payment)

To Hire-Purchaser

(iii)On interest being due:

Hire – Purchaser A/c Dr. Amt. of Interest

To Interest A/c.

(iv)On receipt of instalment:

Cash/bank A/c. (Amt. of Instalment)

To Hire – Purchaser

(v)On Transfer of Balance of Hire-Sales A/c. to Trading A/c. (at the end of first year only):

Hire – Sales A/c Dr. Cash Price

To Trading A/c.

(vi)On Transfer of amount of interest to P/L A/c:

Interest A/c. Dr. (Balance of Intt. A/c.)

To P/L A/c.

Note: In solving a numerical problem, before recording the entries, the amount of interest included in various instalments will be separately calculated as already explained.

Posting in Ledger Accounts:

After passing entries in the journall of hire – vendor the following accounts will be opened in the ledger of hire – vendor and the postings will be made accordingly.

(i) Hire – Purchaser A/c.
(ii) Hire – Sales A/c. (only in first year)
(iii) Interest A/c.


Calculate the amount of annual instalment, and show the Journal entries and necessary ledger accounts in the books of Moti Ltd. for three years. The present value of Annuity of Rupees one for three years at 5% is 2.72325.

Worked out examples-3:

On 1st April,2005 X Company Ltd. purchased a machine from Y Machines Ltd. on hire-purchase basis, the cash price being Rs. 55,850 Rs. 15,000 was paid on the signing of the contract and the balance in three annual instalments of Rs. 15,000 each on 31st March each year. Interest is charged at 5% per annum. Depreciation was written off at rate of 10% per annum on the diminishing balance system.

Give journal entries in the books of X Company Ltd. whose accounting year ends on 31st March each year, under Asset Accrual Method.


Solution:



(a) under Asset Accrual Method
Journal Entries in the Books of X Co. Ltd. Date Particulars LF Dr.(Rs.) Cr.(Rs.)
2005
April 1 Machinery A/c …………….Dr.

To Bank A/c
(Being down payment made at the time of delivery)
15,000

15,000
2006
March 31 Machinery A/c ……………………………………...Dr.

Interest A/c ....................Dr.
To Y Machine Ltd.
(Being the first instalment due).
12,957

2,043


15,000
" Y MachinesLtd. …………………Dr.

To Bank
(Being the amount paid in first instalment)
15,000

15,000
" Depreciation A/c …………………Dr.

To Machinery A/c
(Being the depreciation charged)
5,585

5,585
" Profit & Loss A/c …………………Dr.

To Interest A/c
ToDepreciation A/c
(Being the amount transferred)
7,628


2,043

5,585
2007
March 31 Machinery A/c ……………………………………...Dr.

Interest A/c ....................Dr.
To Y Machine Ltd.
(Being the second instalment due).
13,605

1,395


15,000
" Y Machines Ltd. …………………Dr.

To Bank
(Being the amount paid in second instalment)
15,000

15,000
" Depreciation A/c …………………Dr.

To Machinery A/c
(Being the depreciation charged)
5,027

5,027
" Profit & Loss A/c …………………Dr.

To Interest A/c
ToDepreciation A/c
(Being the amount transferred)
6,422

1,395

5,027
2008
March 31 Machinery A/c ……………………………………...Dr.

Interest A/c ....................Dr.
To Y Machine Ltd.
(Being the third instalment due).
14,288

712


15,000
" Y Machines Ltd. …………………Dr.

To Bank
(Being the amount paid in third instalment)
15,000

15,000
" Depreciation A/c …………………Dr.

To Machinery A/c
(Being the depreciation charged)
4,524

4,524
" Profit & Loss A/c …………………Dr.

To Interest A/c
To Depreciation A/c
(Being the amount transferred)
5,236

712

4,524