Hi

I have just purchased a Smart car for the business with the aid of a hire purchase agreement the terms of which are as follows:

Total cash price of car: £10,000
Deposit already paid £1000
Amount of credit £9000 - 36 payments of £159.98 with an optional purchase payment of £4,080 that is due 35 months after the first payment. If this option is taken up a purchase activation fee of £95 is also payable at the time of the optional purchase payment.

There is also an acceptance fee of £140 which is payable at the time of the first monthly payment.

The total amount payable is £11,074.28.

Obviously this is all a bit complicated and I would be very grateful as to what entries should be made on my accounts!

Any advise gratefully received.

Many thanks

Joe Happe

Hi Joe,

Is your business registered for VAT? If so, does the £10,000 cost of the car include VAT?

Thanks

Hi Mark thanks for getting back to me. No my business is not registered for VAT. The price of the car is inclusive of VAT.

Cheers

Joe Happe

Hi Joe,

OK, here's how I would record your transactions: (Please note that I am not an expert on accounting for hire purchase agreements so please check the following advice with your accountant).

You should create a new liability account called 'Hire Purchase Liability' to keep track of the loan outstanding on the car.

Initially record 3 transactions:
1. Record the car purchase as a Money Paid Out transaction from this liability account to the 'Motor Vehicles' asset account for £10,000.
2. Record the initial deposit as a General Transaction from the Cheque Account to the Hire Purchase Liability account for £1,000.

3. Record the acceptance fee as a Money Paid Out transaction from the Cheque Account to the Motor Expenses account for £140

Each month record a Money Paid Out transaction with the Type field set to 'General Payment'. Set the amount to £159.98. In the Allocate To Account table enter two accounts:
1. 'Interest Charges' for £23.31
2. 'Hire Purchase Liability' for £136.67
(To handle rounding, every third month the figures should be £23.32 and £136.66 instead)

At the end of the agreement, if you buy the car create a Money Paid Out transaction for £4,175 allocated to two accounts:
1. 'Hire Purchase Liability' for £4,080
2. 'Motor Expenses' for £95

Alternatively, if you return the car at the end of the agreement create a General Transaction from the Motor Vehicles account to the Hire Purchase Liability account for £4,080. You should also create another General Transaction from the Motor Vehicles account to the 'Depreciation and Loss on Sale' account for the residual value of the car.

Regards,

Hi Mark thanks for getting back to me.

Just one question if I may? I have recorded the transactions as per your instructions and it now shows that I owe £9000 on the Hire Purchase Liability account. However, is it right that this does not take into account the interest also owed of £839.28?

I am probably not explaining myself very clearly sorry; but the agreement is to borrow £10000 over 3 years at £159.98 per month with a total amount payable of £11.074.28 which includes the acceptance fee, purchase activation fee AND interest.

Do I need to record a further transaction in relation to the interest owed?

Once again sorry to be a pain!

Cheers

Joe

Hi Joe,

No, you should not record the interest 'up front'. The benefit to your business of the loan is spread out over 3 years, so the cost of the loan (ie. the interest expense) should also be spread out over the 3 years. (The same applies to other services you receive - for example, if you receive advertising over 3 years you would record an advertising cost in each year).

Regards,