AccountancyHire purchase accounts: interest and entries
Under hire purchase you use the asset from the first day and pay over time. Each instalment is part price and part interest, and the accounts must split the two.
What hire purchase is
Under a hire purchase agreement the buyer (hire purchaser) gets possession of the goods at once and pays the price in instalments. The seller (hire vendor) remains the owner until the last instalment is paid. If the buyer stops paying, the seller can take the goods back, and the instalments already paid are treated as hire charges.
Hire purchase and instalment sale compared
| Basis | Hire purchase | Instalment sale |
|---|---|---|
| Ownership | Passes on payment of the last instalment | Passes at once, on signing |
| Nature | Agreement of hiring with an option to buy | An outright sale on credit |
| Default | Seller may take back the goods | Seller can only sue for the unpaid price |
| Risk of loss | With the seller until ownership passes, unless agreed otherwise | With the buyer |
Terms
- Cash price: the price at which the asset could be bought for immediate full payment.
- Down payment: the amount paid on signing the agreement.
- Hire purchase price: down payment plus all instalments.
- Interest: hire purchase price − cash price. It is the charge for paying later.
Splitting each instalment into principal and interest
Only the cash price is the cost of the asset. Interest is a revenue expense of the year to which it relates. The method depends on what the question gives.
Case 1: cash price and rate of interest are given
Interest for each period = rate × cash price outstanding at the start of the period.
Example. On 1 April 2022 Kiran Transport buys a truck on hire purchase from Shakti Motors. Cash price ₹1,00,000. Down payment ₹20,000. The balance is payable in four yearly instalments of ₹20,000 each plus interest at 10% a year on the outstanding balance, on 31 March each year.
| Year ended 31 March | Opening balance | Interest at 10% | Principal paid | Instalment paid | Closing balance |
|---|---|---|---|---|---|
| 2023 | 80,000 | 8,000 | 20,000 | 28,000 | 60,000 |
| 2024 | 60,000 | 6,000 | 20,000 | 26,000 | 40,000 |
| 2025 | 40,000 | 4,000 | 20,000 | 24,000 | 20,000 |
| 2026 | 20,000 | 2,000 | 20,000 | 22,000 | 0 |
| Total | 20,000 | 80,000 | 1,00,000 |
Hire purchase price = ₹20,000 + ₹1,00,000 of instalments = ₹1,20,000. Total interest = ₹1,20,000 − ₹1,00,000 = ₹20,000, which agrees with the interest column.
Case 2: cash price and equal instalments are given, but no rate
Total interest = hire purchase price − cash price. It is spread over the years in the ratio of the amounts outstanding at the start of each year. Example: cash price ₹74,500, three yearly instalments of ₹30,000, no down payment. Total interest = ₹90,000 − ₹74,500 = ₹15,500. Hire purchase price outstanding at the start of each year: ₹90,000, ₹60,000, ₹30,000, a ratio of 3 : 2 : 1. Interest: ₹7,750, ₹5,167 and ₹2,583.
Case 3: rate and instalments are given, but not the cash price
Work backwards from the last instalment. If the rate is 10%, an instalment of ₹110 paid at the end of a year contains ₹10 of interest for every ₹100 outstanding at the start, so interest = 10/110 of the amount due at the end. Take the last instalment, remove its interest to get the principal outstanding a year earlier, add the previous instalment, and repeat. The figure reached at the start, plus the down payment, is the cash price.
Entries in the books of the hire purchaser
Two methods are used. Under the full cash price method the asset is recorded at its full cash price at once, as if owned. Under the asset accrual method the asset is recorded only to the extent of cash price paid each year. The first is more common and is shown here, with depreciation at 15% a year on cost by the straight line method.
| Date | Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| 2022 Apr 1 | Truck A/c Dr. | 1,00,000 | |
| To Shakti Motors | 1,00,000 | ||
| (Truck bought on hire purchase at cash price) | |||
| 2022 Apr 1 | Shakti Motors Dr. | 20,000 | |
| To Bank A/c | 20,000 | ||
| (Down payment made) | |||
| 2023 Mar 31 | Interest A/c Dr. | 8,000 | |
| To Shakti Motors | 8,000 | ||
| (Interest due for the year at 10% on ₹80,000) | |||
| 2023 Mar 31 | Shakti Motors Dr. | 28,000 | |
| To Bank A/c | 28,000 | ||
| (First instalment paid) | |||
| 2023 Mar 31 | Depreciation A/c Dr. | 15,000 | |
| To Truck A/c | 15,000 | ||
| (Depreciation at 15% on cash price) | |||
| 2023 Mar 31 | Profit and Loss A/c Dr. | 23,000 | |
| To Interest A/c | 8,000 | ||
| To Depreciation A/c | 15,000 | ||
| (Interest and depreciation transferred) | |||
| Total | 1,94,000 | 1,94,000 | |
| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| 2022 Apr 1 | To Bank A/c (down payment) | 20,000 | 2022 Apr 1 | By Truck A/c | 1,00,000 |
| 2023 Mar 31 | To Bank A/c (instalment) | 28,000 | 2023 Mar 31 | By Interest A/c | 8,000 |
| To Balance c/d | 60,000 | ||||
| 1,08,000 | 1,08,000 |
The balance owed after the first year is ₹60,000, matching the table. In the balance sheet the truck appears at ₹85,000 (₹1,00,000 less depreciation) and the amount due to the vendor at ₹60,000, usually shown as a deduction from the asset or as a liability.
Entries in the books of the hire vendor
| Date | Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| 2022 Apr 1 | Kiran Transport Dr. | 1,00,000 | |
| To Hire Purchase Sales A/c | 1,00,000 | ||
| (Truck sold on hire purchase at cash price) | |||
| 2022 Apr 1 | Bank A/c Dr. | 20,000 | |
| To Kiran Transport | 20,000 | ||
| (Down payment received) | |||
| 2023 Mar 31 | Kiran Transport Dr. | 8,000 | |
| To Interest A/c | 8,000 | ||
| (Interest due for the year) | |||
| 2023 Mar 31 | Bank A/c Dr. | 28,000 | |
| To Kiran Transport | 28,000 | ||
| (First instalment received) | |||
| Total | 1,56,000 | 1,56,000 | |
For the vendor, the interest of each year is income of that year.
Default and repossession
If the buyer fails to pay, the vendor may take back the goods. In complete repossession the vendor takes back all the goods; the buyer closes the vendor's account by transferring its balance to the asset account and writes off the difference as a loss. In partial repossession the vendor takes back only some of the goods, at an agreed value, and the buyer keeps the rest and continues to pay for them.
For study only. This page explains the accounting method taught in B.Com courses. Real hire purchase and loan agreements are governed by their own terms and by the law in force; read the agreement and ask a qualified person before signing.
Questions students ask
When does ownership pass under hire purchase?
On payment of the last instalment. Until then the hire vendor remains the owner, though the buyer has possession and use.
At what value is the asset recorded by the hire purchaser?
At its cash price. The interest included in the instalments is charged to the Profit and Loss Account of the years to which it relates.
How is total interest found under hire purchase?
Total interest = hire purchase price (down payment plus all instalments) minus cash price.
More B.Com topics
For study, and independent. These pages explain accountancy as it is generally taught in Class 11, Class 12 and B.Com courses in India, in our own words with our own examples, reviewed in November 2026. This site is not connected with NCERT, CBSE, ICAI or any board or university. Syllabuses change: follow your own board's or university's current syllabus and textbook. Nothing here is professional accounting, tax or legal advice.