Accounting for Hire Purchase Agreements

Question: How do you enter transactions when you purchase a fixed asset using Hire Purchase (HP) from a finance company in MYOB AccountRight?

Answer:
Create Balance sheet accounts as follows:
1. Asset account called Fixed Asset, GST code S15
2. Liability account called eg: Hire Purchase – ABC Finance, GST code N-T
3. Liability account underneath the Hire Purchase account called Interest In Advance, GST code N-T

Enter the purchase from the supplier:
Line 1: the purchase price of the asset coded to Fixed Assets – GST is S15HP
Line 2: the amount of the interest on the contract coded to Interest In Advance
Line 3: a negative amount representing the amount financed, coded to Hire Purchase
The total of the purchase may be zero if it is 100% financed, or there may be a balance if you had to pay a deposit. The deposit can be entered using Pay Bills against the purchase; then the balance of the purchase should be zero.

When paying the instalments code them all to the Hire Purchase a/c. Your accountant will make an adjustment at year end to recognise the amount of interest which has expired.

(If there is a “balloon payment” or a residual payment to be paid as in the case of some vehicle loans these days, then the procedure is much more complicated and you should enlist the assistance an MYOB certified consultant).

Lynley Averis

Lynley is an MYOB Certified Consultant & has been involved in training in New Zealand since 1985. She's written various accounting & MYOB workbooks including co-authoring “Bookkeeping for Dummies”. She has consulted on all versions of MYOB Accounting, Retail and Payroll over the past 18 years and has previously worked for MYOB. She currently consults to NZ businesses on all aspects of business systems - her mission for clients is for them to spend as little time as possible doing accounting!

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