Blogger
Share this content
0
14
33010

Hire purchase journal

Client bought a van for £8225 inc vat [ie £7k net]- vat was 17.5%

deposit was £1000

total finance £7225. Client reclaimed vat correctly. Term of loan is 36 months

what is the journal required to bring the asset and HP liability into the accounts?/......thanks in advance everyone

Replies

Please login or register to join the discussion.

30th Nov 2011 10:04

Interest-free HP?

The figures do not sound right.

If the cash price was £7,000 plus £1,225 of VAT, which was reclaimed as input tax, the double entry is:

DR B/S Motor Vehicles   £7,000

CR B/S HP Liabilities     £7,000

If the total payments are only £8,225, the HP company is not charging any interest.  You need to look at the HP agreement and see what HP charges (interest) have been added to the cash price including VAT.

It is also unusual for the deposit paid to be less than the VAT.

Thanks (0)
avatar
30th Nov 2011 10:19

sorry forgot to add that 36 monthly repayments £250.00- ie total payable £9000

Any ideas how I journal this into accts?

Thanks (0)
avatar
30th Nov 2011 10:30

If you have a supplier account -

I would post the supplier invoice (£7000net, £1225 VAT), make a bank payment of £1000 against this, and then raise a credit note for the balance (£7225) and post this to HP?

The 36 monthly payment of £250 need to be posted as follows. The HP element of £200.69 needs to be posted to HP, and the interest of £49.31 needs to be posted to HP Interest

The first payment will also normally include an addition fee which needs to be posted to HP Interest.....

Hope that sounds ok to you. Im using Line 50 and this is how I normally do it.

 

Or -

DR Assets £7000

DR VAT £1225

CR Bank £1000

CR HP £7225

Thanks (0)
avatar
30th Nov 2011 10:44

Disagree!

Firstly the original supplier (motor trader) invoice is now nothing to do with the client!  His VAT document is the HP agreement.

Therefore: -

Dr FASS £7,000.00

Dr VAT 1,225.00

Dr HP Def. Int. (G/L) 775.00

Cr HP Creditor (G/L) 9,000.00

ALL payments go to the HP Creditor a/c

A Gen. Jrnl is req for each management accounting period to transfer the relevant portion of the def. int. to P&L.  For such small amounts straight line should be OK.

Thanks (1)
avatar
30th Nov 2011 10:48

Sorry.....was my first ever answer

 

I did say thats how I would do it.....and my accountants have always agreed with that. I did that with a forklift last week.

Apologies if that was incorrect.

Thanks (0)
avatar
30th Nov 2011 11:06

agreed

Thanks (0)
avatar
By Old Greying Accountant
30th Nov 2011 11:14

A bit harsh Richard ...

... the end result is correct, and if the deposit cheque goes to the supplier then that is where it should be posted!

You could argue you should then raise a supplier payment to clear the creditor and do a journal - debit bank; credit HP loan - which will balance the "ghost" payment and agree the bank (that is the substance of the transaction if not the form).

It does depend if it is HP or lease purchase, as in the former you buy the asset from the supplier (title passes at the start - the asset is charged) in the latter the finance company does (title passes at the end)

Don't forget with the interest it should be charged on an actual or a rule of 78 method and not straight line, so more will be charged in early years!

Thanks (0)
avatar
30th Nov 2011 11:33

Sorry OGA, I have to disagree with you too!

Rare, I know, and sorry to rant (bad week!) but: -

I can no longer see the OP in this mode but I thought it stated HP specifically. 

If a deposit of £1000 has been invoiced by the trader and paid this becomes a payment on account to the HP co via the trader (and the HP co will deduct it from their payment to them).  The trader should therefore issue a Credit Note to the client, keeping in mind that if this IS the case it SHOULD have included VAT!

I spent 30 years with a machinery company involving transactions in the hundreds of thousands.  We VERY often were not told of the involvement of finance companies until the last minute (or later!) and I often had to unwind transactions and route them via HP companies, both here and abroad.  I have had company personnel argue the toss about most matters connected with this line of business and even had them get their accountants to call me to 'put me straight'.  I cannot recall ever being proved wrong.  I am, however, open to being so proved now if you can persuade me!  I agree with your comment about the interest but unless the amounts are substantial use of straight line will not be material and so would be ignored by most auditors that I have come across.

Oh, and we were deemed totally VAT compliant at every inspection, annually in the early years as we were net claimants.

Thanks (0)
avatar
30th Nov 2011 11:51

Oh

and sorry, @Emsabobs, I didn't mean to sound harsh!

Thanks (0)
avatar
By Old Greying Accountant
30th Nov 2011 13:42

I defer to your knowledge Richard ...

... but in a small unaudited business, as long as the balance sheet is accurately reflected (i.e. the company recognises the finance company as the creditor), the rest is largely irrelevant and just making mountains out of molehills! From the tone of the OP I doubt there are SAGE/QB type books and that it is a omb small business and having done schedules of payments and receipts wants to get the new asset in the accounts

The OP actually says loan at one point so it may be that, and not HP at all :o)

Thanks (0)
avatar
30th Nov 2011 14:18

Of course we can all make mistakes!

I have just noticed that I omitted to take into account the deposit in my jnl above.  This means that the HP creditor should actually be £10k, with the deposit payment debited off to reach the £9k (36 x 250).  This makes the def int £1,775, not £775 as I stated!  I thought it was a bit cheap!

Also any option-to-purch fee should be added to the creditor and FASS value (as it forms part of the purch price) but any setup fee should be w/o at source to P&L.

Thanks (0)
avatar
By neileg
30th Nov 2011 14:51

At least two right ways

Come on guys, there are at least two acceptable ways of showing these HP transactions plus a few variations. The main difference between the two is whether you show the gross HP creditor with an interest suspense or just the outstanding capital as a creditor.

Clearly if the sale is on HP, then any transactions with the supplier need to be unwound from the accounts unless he is acting as an agent for the HP company.

Thanks (0)
avatar
30th Nov 2011 16:18

@Neileg

I suppose it's all a question of scale.  The problem I have with carrying the net creditor is that if the auditors circularise an HP creditor and ask them to confirm the outstanding balance they will only return the outstanding payments, i.e. the gross figure.  If the def int is kept apart then the creditor can be ticked to the G/L without further investigation (assuming they agree of course).  Also the future payments schedule should show the gross figure as all or most of the finance charge would be payable if the agreement was terminated and, again, it is far tidier if this agrees with the G/L.

I can understand that in small companies, where there may only be one or two agreements, this may not present much of a problem:  I have historically worked in companies turning over millions.

Thanks (0)
avatar
By neileg
30th Nov 2011 16:34

@Richard

I don't disagree. I just thought we were getting a bit heavy on the 'correct' way of dealing with this. I work in an organisation where the turnover is currently about £1.4bn so I understand about scale, but I suspect we're not in IFRS territory here!

I believe if you ask 10 accountants the same question you'll get 10 different answers - and they'll all be right!

Mind you, if you ask 10 lawyers the same question you'll get 10 reasons why they can't answer the question.

And if you ask 10 doctors, you'll get 90 sets of reasons why the other doctors have got it wrong.

Thanks (0)