Understanding Hire Purchase and Installment Systems

Aug 6, 2024

Lecture Notes on Hire Purchase and Installment Systems

Introduction

  • Regular Accounts: Starting from Monday, with focus on December sessions.
  • Topics Covered: Hire Purchase basics, followed by questions and further details.
  • Upcoming Topics: Lease and other chapters based on comments.
  • Exam Month: Catering to UG students, aiming to complete syllabus before exams.

Hire Purchase Basics

  • Definition: Buying items on installments (e.g., iPhones on installments due to affordability).
  • Key Terms:
    • Down Payment: Initial payment for an asset.
    • Remaining Amount: Amount left after down payment, paid in installments.
    • Interest: Additional cost due to time period over which installments are paid.

Hire Purchase vs. Installment System

  • Ownership Transfer:
    • Hire Purchase: Ownership transfers after full payment.
    • Installment System: Ownership transfers after first payment.
  • Implications:
    • Hire Purchase: Asset can be repossessed if not paid fully; treated as rent until fully paid.
    • Installment System: Asset is owned after first payment; treated as a loan.
  • Legal Procedures:
    • Hire Purchase: Recovery of the asset if payments are defaulted.
    • Installment System: Legal action for loan recovery if payments are defaulted.

Calculations in Hire Purchase

  • Principal and Interest: Important to differentiate between these for depreciation purposes.

Example 1: Interest Not Included in Installment

  1. Asset Price: тВ╣46000
  2. Down Payment: тВ╣6000
  3. Remaining Amount: тВ╣40000
  4. Annual Installments: тВ╣8000 plus 5% interest
  5. Interest Calculation: On remaining amount each year
  6. Total Paid: тВ╣46000 (Principal) + тВ╣3000 (Interest) = тВ╣49000

Example 2: Interest Included in Installment

  1. Asset Price: тВ╣37250
  2. Down Payment: тВ╣10000
  3. Remaining Amount: тВ╣27250
  4. Installments: Three installments of тВ╣10100
  5. Interest Calculation: Included in installments
  6. Cost and Interest Breakdown: Differentiating principal and interest in each installment

Upcoming Topics and Next Class

  • General Entries and Account Creation: Detailed in the next class.
  • Further Topics: Half-yearly and quarterly installments.
  • Exam Preparation: Focus on both theory and practical aspects.
  • Final Notes: Aim to cover remaining chapters within the week to accommodate various university exam schedules.

Conclusion

  • Next Steps: Review today's material, prepare for upcoming classes.
  • Feedback: Comment on additional topics needed.
  • Thank You: For participation and engagement.

Full transcript