Saturday, October 13, 2012

Financial Accounting - 2011 (Solved)

Hire Purchase - Meaning:
A trader could sell goods either for cash or for credit. For goods sold on credit, the payments may be made by the buyer in lump sum on a future date, or in installments spread over for a specified period of time. When goods are sold on credit, for which payment is made by the buyer in installments over a period of time, it is called purchase system or installment system.
Hire Purchase System defers to the system wherein, the seller of goods delivers the goods to the buyer without transferring the ownership of goods. The payment for the goods will be made by the buyer in installments. If the buyer pays all the installments, the ownership of the goods will be transferred, on payment of the last installment. However, if the buyer does not pay for any installment, the goods will be repossessed by the seller and the money paid on earlier installments will be treated as hire charges for using the goods. So, under this system, the transaction may result in purchasing of goods by the buyer or in hiring the goods. Hence, the system is called Hire Purchase System.

Characteristics of Hire-Purchase System
The characteristics of hire-purchase system are as under
a)      Hire-purchase is a credit purchase.
b)      The price under hire-purchase system is paid in installments.
c)       The goods are delivered in the possession of the purchaser at the time of commencement of the agreement.
d)      Hire vendor continues to be the owner of the goods till the payment of last installment.
e)      The hire-purchaser has a right to use the goods as a bailer.
f)       The hire-purchaser has a right to terminate the agreement at any time in the capacity of a hirer.
g)      The hire-purchaser becomes the owner of the goods after the payment of all installments as per the agreement.
h)      If there is a default in the payment of any installment, the hire vendor will take away the goods from the possession of the purchaser without refunding him any amount.

Differences between Hire Purchase System and Installment Purchase System:
Hire-Purchase System
Installment Purchase
It is a contract of hiring.
It is a contract of sale.
It is transferred by seller to buyer only after payment of all installments.
It is transferred by seller to buyer, immediately on signing the contract.
In this case, the buyer is like a bailee
In this case, the buyer is not in the position of a bailee
Such risk is on the seller.
Such risk is on the buyer.
On default of payment of any installment by the buyer, the seller can repossess the goods.
On default and payment of any installment by the buyer, seller cannot repossess the goods, but can file a suit in the court of law against the buyer for the recovery of unpaid price.
The buyer can exercise the option of return of goods.
The buyer cannot exercise the option of return of goods.
The buyer cannot dispose the goods, until the payment of last installment. If disposed, the third party buyer does not get a better title.
The buyer has the right to dispose the goods, even if all installments are not yet paid.