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Hire Purchase double entry

I am preparing the accounts for a client, using his previous accountants bookkeeping.
He has a HP agreement on which he pays installments of £210 per month. 

During the financial year, the previous accountant had done only the following entries each month with regards the HP contract:

Dr Trade Creditors (finance company) £210

Cr Bank £210

I know that I need to somehow account for the interest portion of things......what is the double entry required? I am going round in circles....again, another simple Q but I'm confusing myself just thinking about it anymore!

Thanks

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HP Double Entry

It's unusual (IMO) to do it through creditors.

If however there is a creditor set up for the HP agreement, then you need to post invoices for the interest payable each month which will DB HP Interest and CR Creditors.

However I would say you need to reconcile that creditor account very carefully.

 

 

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It's dr HP interest (P&L) &

It's dr HP interest (P&L) & cr creditors. You should extract the balance from the trade creditors in the accounts and show as a separate liability as well.

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thanks guys, managed to sort it out thanks to your comments.

I too was puzzled to see it go through trade creditors....not the way I would've set it up, but hey ho!

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Have you checked

That there is in fact interest?

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3 elements

There are 3 elements :

1 - Create the HP creditor and include the cost of the item (exc interest) in Fixed Assets : Dr FA / Cr HP Creditor account (or in this case, the creditors ledger ?).

2 - Post depreciation (Dr P&L charge / Cr Depn).

3 - Expense the interest charge as incurred (Cr Cash / Dr HP Creditor in B/S and also Dr interest charge to P&L).

 

I am not sure how the previous Accountant posted the original journals if the only entries relate to one months payment ? - is the total liability shown in the accounts ? (if so, where has the debit been posted to ?).

You do not mention Fixed assets - is this item on the FAR ?

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