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Unit III Accounting For Hire Purchase And Installment System, Consignment And Joint Ventur For Financial Accounting Bcom Sem 1 Delhi University Notes

by yuvaraja reddy

Unit III Accounting For Hire Purchase And Installment System, Consignment And Joint Ventur For Financial Accounting Bcom Sem 1 Delhi University Notes

Unit III Accounting For Hire Purchase And Installment System, Consignment And Joint Ventur For Financial Accounting Bcom Sem 1 Delhi University : Hire purchase is an agreement between two parties in which one party purchase any http://www.svtuition.org/2010/02/assets.htmlfrom other party. Because he has no money to pay, so he pays per month hire charges. Vendor has the possession of asset. When buyer pays total price of assets in the form of hire charges, then asset is transferred to its purchaser. Vendor may  also transfer asset before last payment of installment on his own risk. If buyer will become defaulter, vendor has right to get his asset from hire purchaser.

Accounting Methods for Hire Purchase Transaction 

For accounting point of view both hire purchase and  instalment payment system are same. Before accounting, we should know following things

a) Cash price is that price which will be paid if any asset is purchased on cash without installment.

b) Hire price = cash price + interest for risk of giving asset on instalment.

c) Down payment = Payment at the beginning of deal of hire purchase.
There are four methods of accounting for hire purchase.

1st Method : Cash Price Method 

Under cash price method, we are deal hire purchase transactions just like normal transactions. When transactions or event happen, we record them.

Journal Entries in the books of Purchaser

a) For buying assets on hire purchase

Asset on hire purchase account Dr.

Vendor account Cr.

b) For paying the down payment to vendor

Vendor account Dr

Cash/ bank

c) When Interest is Due on unpaid installments

Interest on Hire Purchase account Dr.

Vendor Account Cr.

d) For Instalment Payment  ( Interest payment will be also included in it)

Vendor Account Dr

Cash / Bank account Cr

e) For transferring interest to profit and loss account 

Profit and Loss account Dr.

Interest on hire purchase account Cr.

f) For depreciation charge

Depreciation account Dr.

Assets on hire purchase account Dr.

g) If Asset is returned

Hire Vendor account Dr.

Asset  on hire purchase account Cr.

Unit III Accounting For Hire Purchase And Installment System, Consignment And Joint Ventur For Financial Accounting Bcom Sem 1 Delhi University Notes

Unit III Accounting For Hire Purchase And Installment System, Consignment And Joint Ventur For Financial Accounting Bcom Sem 1 Delhi University :

Hire-Purchase system
It is a special system of purchase and sale of goods. Under this system purchaser pays the price of the goods in installments. The installments may be annual, six monthly, quarterly, monthly fortnightly etc. Under this system the goods are delivered to the purchaser at the time of agreement before the payment of installments but the title on the goods is transferred after the payment of all installments as per the hire-purchase agreement. The special feature of a hire-purchase transaction is that the payment of every installment is treated as the payment of hire charges by the purchaser to the hire vendor till the payment of the last installment. After the payment of the last installment, the amount of various installments paid is appropriated towards the payment of the price of the goods sold and the ownership or the goods is transferred to the purchaser.
Installment Payment System
It is system of purchase and sale of goods in which title of goods is immediately transferred to the purchaser at the time of sale of goods and the sale price of the goods is paid in installments. In the event of default in payment of any installment, the seller has no right to take back goods from the possession of the purchaser. He can file a suit for the recovery of the outstanding balance of the price of goods sold. The followings are the differences between Hire-purchase system and Installment payment system:
Difference between Hire-Purchase and Installment System
Ownership
In Hire-purchase system, the transfer of ownership takes place after the payment of all installments while in case of Installment payment system, the ownership is transferred immediately at the time of agreement.
Type of Contract / Agreement
In Hire-purchase system, the hire-purchase agreement is like a contract of hire though later on it may become a purchase after the payment of last installment while in Installment payment system, the agreement is like a contract of credit purchase.
Possession / Rights of Parties
In case of default in payment, in Hire-purchase system the vendor has a right to back goods from the possession of the hire-purchaser while in case of Installment payment system, the vendor has no right to take back the goods from the possession of the purchaser; he can simply sue for the balance due.
Sales of Goods / Property
In Hire-purchase system, if the purchaser sells the goods to a third party before the payment of last installment, the third party does not get a better title on the goods purchased. But in case of Installment payment system, the third party gets a better title on the goods purchased.
Applicable Act
In Hire-purchase system the provisions of the Hire-purchase Act apply to the transaction while in case of Installment payment system, the provisions of Sale of Goods Act apply to the transaction.

Unit III Accounting For Hire Purchase And Installment System, Consignment And Joint Ventur For Financial Accounting Bcom Sem 1 Delhi University Notes

Unit III Accounting For Hire Purchase And Installment System, Consignment And Joint Ventur For Financial Accounting Bcom Sem 1 Delhi University :  The main points of difference between consignment and joint venture are as follows:-

Parties: –

In consignment there are two parties i.e. the principal and the agent, whereas, in joint venture the number of parties are two or more where all the parties are of equal status i.e., each is principal and agent at the time like partners.

Difference between Consignment and Joint Venture

Relationship: –

In case of consignment, the relationship between consignor and consignee is principal and the agent, whereas, in case of joint venture both the co-venture is principal.

Term (Period): –

ADVERTISEMENTS:

Consignment is not confined to any specific term or period, but joint venture is confined only to a specific venture.

Business Activity: –

Consignment concern only sale of movable goods, but joint venture may be concerned with any type of business activity with the expectation of a profit such as construction of a road, making of a firm, underwriting a share issue, etc. besides purchase and sale of goods.

Accounting Methods: –

In case of consignment accounts are prepared only be single method, whereas in case of joint venture, accounts are prepared by four methods.

Ownership: –

The owner of consignment is always on consignor and the agent has no right of ownership in the goods being dealt with, but in case of joint venture, all the co-ventures are the joint owner.

Sharing of Profit or Loss:-

ADVERTISEMENTS:

The profit on the consignment belongs to the principal; he will bear all the loss and the agent will get only a commission for his work; but in case of joint venture the profit or loss is shared equally by all the concerned parties, unless otherwise decided.

Account sale:-

In case of consignment account sale is prepared for providing the sales information to consignor; but in case of joint venture there is no need to prepare account sale, simply information in other ventures are required.

Valuation of Unsold Stock: –

In case of consignment if goods are unsold with consignee, valuation of stock is essential, but in case of joint venture there is no need of valuation of unsold stock as the joint venture is closed down.

Unit III Accounting For Hire Purchase And Installment System, Consignment And Joint Ventur For Financial Accounting Bcom Sem 1 Delhi University Notes

Unit III Accounting For Hire Purchase And Installment System, Consignment And Joint Ventur For Financial Accounting Bcom Sem 1 Delhi University :  The distinction between joint venture and consignment may be made as follows:

Joint Venture:

(i) The parties to a joint venture are called co-venturers.

(ii) Joint venture is the result of a partnership contract for a limited purpose among the co-venturers.

(iii) Being a partner, each co-venturer is the principal as well as the agent of all the other co-venturers. Thus, a co-venturer sells goods on his own behalf as well as on behalf of all the other co-venturers. Provisions of partnership act apply.

(iv) All the co-venturers bear the risk.

(v) A co-venturer has an implied authority to buy and sell goods and to receive and make payments.

(vi) The co-venturers share the profits and losses of the joint venture in the ratio agreed upon by them.

(vii) Funds are provided usually by all the co-venturers.

Consignment:

(i) The parties to a consignment are called consignor and consignee.

(ii) In consignment, there is a contract of agency between the consignor and the consignee.

(iii) The consignee is the principal and consignee is the agent. The consignee sells goods on behalf of the consignor. Provisions of contract act relating to agency apply.

(iv) Only the consignor bears the risk.

(v) A consignee has no implied authority. He is to work as per specific instructions given by the consignor.

(vi) The entire profit or loss on consignment belongs to the consignor. The consignee gets his commission on sales and has nothing to do with profit or loss on consignment.

(vii) Funds are provided solely by the consignor. Being only an agent, the consignee is not required to provide any funds though sometimes he may make an advance against future sales.

Unit III Accounting For Hire Purchase And Installment System, Consignment And Joint Ventur For Financial Accounting Bcom Sem 1 Delhi University Notes

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