Hiring is an agreement, in which the hire vendor transfers an asset to the hire purchaser, for consideration. The consideration is in the form of Hire Purchase Price (HPP) which includes cash down payment and installments. The hire purchase price is normally higher than the cash price of the article because interest charges are included in that price. The installment paid by the hirer at periodical intervals up to a specified period. The installment is a sum of finance charges i.e. interest and the capital payment i.e. principal.
Under Hiring transaction only the possession of the assets are transferred to the hirer. However, there is a condition of the transfer of ownership, i.e., hire purchaser ought to pay all the installments due on the asset transferred. By virtue of this, if the hire purchaser is unable to pay the outstanding installments, then the hire vendor can repossess the asset without paying any compensation to the hirer.
The recording of accounting transactions in the books of hire vendor and hire purchaser is different. The method of accounting used by the parties is as under:
- In the books of hire vendor:
Interest Suspense Method
Sales Method - In the books of hire purchaser:
Interest Suspense Method
Cash Price Method
