Tag Archives: Hire Purchase

How to record a Hire Purchase transaction in QuickBooks accounting software?

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

quickbooks-accounting-software-hire-purchase

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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Hire Purchase – Interest in Suspense Method

Software: MoneyWorks accounting software

When purchasing office equipment or machinery, business owner frequently use Hire Purchase to finance their purchases. There are multiple accounts involved in hire purchase transactions; there are fixed asset, Hire Purchase Creditor, Interest in Suspense and HP Interest expense accounts.

Assuming you purchase a new Office Equipment at $20,000 and financed it with a Hire Purchase plan.

Hire Purchase Principal: 20,000.00

First month installment: 635.00

Subsequent monthly installment: 639.00 x 35 month

Total Interest charge (base on 5% interest): 3,000.00 (1,000.00 * 3 years)

Purchase of Office Equipment

Upon receiving the bill from your Supplier for an Office Equipment purchased, you record it as a Purchase Invoice. The account use in this Purchase Invoice will be Cost – Office Equipment (Fixed Asset type of account in Balance Sheet). The double entry for this transaction will be:

Debit: Cost – Office Equipment account: 20,000.00

Credit: Accounts Payable: 20,000.00

Payment for Office Equipment purchased

Once your Hire Purchase has approved, Credit Company will arrange the payment to your Creditor for the Office Equipment purchased. Hence, you need to do a Payment in MoneyWorks to knock off the amount owe with a “Contra” Bank account (contra bank account is used since there is no physical money paid out from your bank). This will:

Debit: Accounts Payable account: 20,000.00

Credit: Contra Bank account: 20,000.00

Transfer to Hire Purchase Creditor account

Next, pass a journal to transfer the amount from “Contra” bank account to your Hire Purchase Creditor account. The double entry will be:

Debit Contra Bank account (Balance Sheet, Bank account type): 20,000.00

Debit Interest Suspense (Balance Sheet, Current Liability type): 3,000.00

Credit Hire Purchase Creditor (Balance Sheet, Current Liability type): 23,000.00

Monthly repayment

Use a payment transaction to pay your Hire Purchase Creditor; the account used will be HP Interest expense account and Hire Purchase Creditor account.

Assuming the monthly repayment is 635.00, of which, 289.00 is the HP interest and HP Principal repayment is 346.00.

In the account tab of the Payment transaction:

Hire Purchase Creditor: 635.00

Less: HP Interest in Suspense: 289.00

HP Interest expense: 289.00

The double entry will be:

Debit Hire Purchase Creditor account (Balance Sheet): 635.00

Credit HP Interest in Suspense account (Balance Sheet): 298.00

Debit HP Interest expense account (Profit and Loss): 298.00

Credit Bank account (Balance Sheet): 635.00

Note: The above shows a simple, one to five years of Hire Purchase schedule, if longer terms required, then, both term liability and current liability may have to be used. Please check with your accountant for details.