The hire-purchase system is a special system of purchase and sale of goods. It is a special system of purchase and sale of goods. Under this system, the purchaser pays the price of the goods in installments. The installments may be annual, six-monthly, quarterly, monthly fortnightly, etc.
Basic Terminologies of Accounting for Hire Purchase System
(1) Hire seller/Hire vendor/Owner
The sum is payable periodically by the hirer under the agreement. A person who sells the goods to the buyer under the hire purchase system is known as a hire seller. Possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical installments.
(2) Hirer/Hire purchaser/Hire buyer
The person who obtains the possession of goods from the owner under a hire-purchase agreement. The person who purchases goods from hire vendor or who obtains the goods from an owner under hire purchase agreement is known as a hirer.
(3) Cash price/Cash value
Total cash price less any deposit. It is a value of goods at which the goods may be purchased by the hirer for cash.
(4) Down Payment
The amount which is paid at the time of taking delivery of the goods. The initial cash payment made by the hire purchaser to the vendor at the time of signing the hire purchase agreement is referred to as a down payment.
(5) Hire Purchase Price
The total sum payable by the hire-purchaser as per terms in order to complete the transactions. The hire purchase price includes the cash price and interest to be paid on the future installment. It is the total sum payable by the hirer to the vendor.
(6) Hire Purchase Charge
Difference between the net hire-purchaser price and the net cash price of the goods. The difference between the hire purchase price and the cash price as stated in the hire purchase agreement is known as hire purchase charge.