Software: QuickBooks #accounting software
Hire Purchase (HP) is a financial product which allows businesses to purchase an asset with monthly instalment. Although the payment of an asset with hire purchase is higher comparing with full payment upon purchase, it eases the cash flow.
Assuming a copier cost $15,000 before 7% GST ($16,050 inclusive of GST) and you decided to get the Copier with a Hire Purchase plan. If the monthly instalment is $320 and based on five years hire purchase plan, the amount paid is $19,200 ($320 * 12 months * 5 years) inclusive of $3,150 hire purchase interest. Although it cost more to buy an asset with hire purchase, it helps small businesses acquire an asset with a low monthly repayment.
Let’s say the first bill received from the finance company is:
Cost of Copier: $15,000.00
Add 7% GST: $1,050.00
Total financed amount: $16,050.00
You record the bill into QuickBooks with the accounts under the Expense tab as:
Row1: Cost of Office Equipment (FA): 15,000 (with 7% GST Code)
Row2: Interest in Suspense (LTL): 3,150
Row3:: Hire Purchase (LTL): -19,200
You create both the Interest in Suspense and Hire Purchase account as a Long-Term Liability since the payment term is more than a year. The double entry of the Enter Bill transaction:
Debit Cost of Office Equipment 15,000
Debit GST Input: 1,050
Debit Interest in Suspense: 3,150
Credit Hire Purchase 19,200
Use a General Journal transaction in QuickBooks to reclassify the current year Interest in Suspense and Hire Purchase repayment amount from the Long-Terms Liability to the Current Liability. Assuming the current year interest is $630 (3,150/5 years), the journal:
Debit Hire Purchase (LTL): 3,840 (19,200/5 years)
Credit Interest In Suspense (LTL): 630
Credit Hire Purchase – Current (CA): 3,840
Debit Interest in Suspense – Current (CA): 630
Subsequently, use Enter Bill (or Write Cheque if no bill received) transaction in QuickBooks to record the monthly repayment bill from the finance company. If you have the monthly repayment schedule, which shows the breakdown of the principal repayment and the interest charged, then record the bill as:
Row1: Hire Purchase – Current
Row2: Hire Purchase Interest
Row3: Less Interest in Suspense – Current
For example, if the monthly interest is 52.50, the transaction will be:
Row1: Hire Purchase – Current: 320.00 (debit)
Row2: Hire Purchase Interest: 52.50 (debit)
Row3: Interest in Suspense – Current: -52.50 (credit)
If you only received a yearly statement from the finance company showing the outstanding hire purchase principal amount instead of a monthly repayment schedule, then pass a journal during year-end closing to debit the Hire Purchase Interest and credit Interest in Suspense – Current account for the interest paid for the year. In this case, the monthly repayment bill shows only the Hire Purchase – Current account of 320.00. The double entry of this bill debits the Hire Purchase – Current account and credit Accounts Payable (or Bank account if Write Cheque is used instead of the Enter Bill transaction).
You should consult your accountant if you have doubt in the accounting entries or classification of accounts.
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