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
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.