Relevant Terms

In connection with the accounting for goods of small value sold on hire purchase basis, we have to define certain terms before we study different methods of ascertaining the profit or loss on such transactions. These relevant terms are




1.    Cost price of goods sold on hire purchase

2.    Value of goods sold on hire purchase

3.    Cash received

4.    Hire Purchase Debtors

5.    Hire Purchase Stock

6.    Stock at shop

 

1.    Cost price of Goods Sold on Hire Purchase : You know the hire vendor is only a dealer. He purchases goods from various manufacturers and sells them to the consumers under hire purchase system. Naturally, he sells the goods at a price higher than the price at which he has bought. His mark- up on hire purchase sales is bound to be more than even the cash price because he has also to cover the loss of interest on such transactions. Normally, interest is accounted for separately as you studied in the case of sale of goods of a substantial value. But, in the case of sale of goods of small value, Interest is ignored and the profit is worked out on the basis of the difference between cost price and hire purchase price. This is called ‘loading’. Loading is generally given in terms of percentage on cost or as percentage of hire purchase price. Usually you are provided with the figure of hire purchase price and you have to work out the cost price with the help of loading. Alternatively, both the hire purchase price and cost price are given and you may have to work out the loading for the purpose of ascertaining profit or loss in hire purchase business.

 

2.    Goods Sold on Hire Purchase: For the purpose of finding out the profit or loss on the hire purchase business during an accounting period, we need the figure of the value of goods sold on hire purchase. This reflects the hire purchase price of all the goods sold on hire purchase basis during the accounting period. This is mostly given. If, however, the value of goods sold on hire purchase is not given, it can be worked out by applying the loading rate to the cost of goods sold on hire purchase. Alternatively, it can be worked out with the help of the first part of the Hire Purchase Trading Account.

 

3.    Cash Received : This refers to the total amount received during the accounting period in respect of hire purchase sales whether they relate to previous years or the current year. This includes the amount of down payment and the amount of instalments paid during the year.

 

4.    Hire Purchase Debtors : It is also known as instalments due but not yet paid’ or ‘Instalment due, customers paying’. Thus, it refers to the total amount of such instalments which have fallen due during the accounting period but have not yet been paid by the hire purchase customers. For purposes of profit on hire purchase business, the total of ‘cash received’ and ‘hire purchase debtors’ is taken as the ‘realised sales’ during an accounting period, and not the goods sold on hire purchase.

 

5.    Hire Purchase Stock : You know when goods are sold on hire purchase basis, customer makes some down payment and agrees to pay the balance in instalments. Some of these instalments become due during the accounting year when goods were sold to him while others shall become due during the following year/years. The instalments which have not become due during the current year, are called ‘instalments not yet due’ or ‘hire purchase stock’. It should be noted that hire purchase stock does not mean stock of goods in the shop. It is a special term used for the total amount of instalments which have not become due during the current year. It represents the unrealised sales and needs adjustment of loading involved. This amount is required for the purpose of ascertaining profit or loss on hire purchase business.

The amount of ‘instalments not yet due’ (hire purchase stock) is usually given. But, if it is not given, the same can be worked out with the help of Hire Purchase Trading A/c.

 

6. Stock at Shop: ‘Stock at shop’ should not be confused with ‘hire purchase stock’. You know that hire purchase stock represents the instalments not yet fallen due. But, the stock at shop is a common term used for unsold goods lying in store. The amount of stock at shop is not relevant to the ascertainment of profit or loss of the hire purchase business. This however, can be helpful in ascertaining the cost of goods sold on hire purchase which, in turn, helps the ascertainment of the value of goods sold on hire purchase (if not given) by adding the loading thereto.

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