Financial Accounting Notes



Hire purchase is a method of extending credit to a buyer. Particularly for some capital goods. Purchase can be defined as a system under which capital goods are acquired with payments through instalments. This method of credit sales allows the buyer to take up goods and even though he has not finished paying it.


Basically, there are two types of goods that can be treated under the hire purchase system. These are large items and small items

For the purpose of convenience, it is usual to divide hire purchase into large and small items. Large items are usually assets in the hands of the buyer while small items are generally those sold to general public e.g. domestic appliances. The accounting treatments for these types of goods are treated as follows:

1. Treatment in the books of the buyer of large items

2. Treatment in the books of the seller of large items

3. Treatment in the books of the buyer of small items

4. Treatment in the books of the seller of small items


1. Under the hire purchase system, goods are delivered to the hirer (the buyer) and he agrees to make payments  as follows:

a. First through initial deposit payment

b. Later, balance of the hire purchase price is paid periodically by instalments over a fixed and given period of time

2. Hire purchase price consists of cost price, profit and hire purchase interest

3. The goods under the hire purchase agreement cannot be transferred or sold by the hire (buyer) until the time instalment payment is made

4. In case where the buyer defaults in the installment payments, the seller has the right to repossess the good

5. Goods on hire purchase transaction can only be possessed by the buyer to claim the ownership until the full price of the goods have been paid

6. Hire purchase transactions and agreement are guided by the terms of such agreement and the hire purchase act.

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