Purpose: To make the necessary transactions at the start of a Hire Purchase contract.
General: There are essentially two types of lease – 1. Finance lease – where you are effectively borrowing finance to pay for goods you will own at the end of the finance; and 2. Operating lease – where you effectively hire the goods and pay for the use but never own the goods. Hire Purchase is a type of finance lease.
With Hire Purchase you usually receive an invoice for the goods and an HP agreement with details of the purchase price, the VAT element, the deposit , the net amount financed, the terms and monthly repayments and details of the final option to purchase amount.
The Accounting Process: Firstly, we deal with the invoice. 1. Create an account in the purchase ledger for the supplier of the goods. 2. Post the invoice if a vehicle post the cost to Fixed Assets vehicles and post any non capital items such as road fund licence to motor expenses and fuel supplied to Fuel. For electric vehicles there may be a grant to take care of as well. In this process you will take care of the VAT as well.
Secondly, we set up a HP liability account in the Current Liabilities section of the nominal ledger. If you are likely to have more than one HP agreement create separate accounts for each.
Thirdly, we post a credit to the Supplier account to clear it and transfer the amount to the HP liability account. Match these items to keep the account tidy. Code this as VAT code N if posting a dummy credit note or you can create a standard journal entry.
Fourthly, post any deposit paid to the HP liability account.
Fifthly, create a HP interest account in the finance expenses section.
Finally, work out the monthly capital repayment = Balance on HP liability account (amount financed) divided by number of repayments. The difference between this figure and the monthly amount repayment shown on the agreement is the HP interest. When each repayment is made you will need to split the amount and post the capital amount to the HP liability account and the interest to the HP interest account.
The final payment will include the option to purchase – this is a finance cost and should go to finance charges in the finance expenses section. There will be VAT on this charge.