Q. How do I handle Hire Purchase transactions?

MoneyWorks Frequently Asked Questions (read only)
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grant
Posts: 318
Joined: 02 Jun 2004 17:42

Q. How do I handle Hire Purchase transactions?

Post by grant » 16 Nov 2005 13:47

Companies frequently purchase capital items on hire purchase, and the question arises as to how to handle the GST and repayments. The best method of doing this appears to be along the following lines.

First, you will need a liability account to represent the debt incurred to the finance company. This will be a term liability, and there will be NO GST on it. For this example we will use an account called FINANCE.

Second you will need an asset account to represent the capital item. This will be a fixed asset, and there WILL be GST on it. For this example we will use an account called ASSET.

Third you will need an account to represent the interest you will be paying. This will be an expense account, and there will be NO GST on it. For this example we will use an account called INT.

So you purchase a vehicle for $45,000 (inc GST), and pay a $4,500 deposit. The entry in MoneyWorks (a cash payment) to record the purchase will be:

Code: Select all

Transaction Amt:   4,500
Acct             Tax Code      Net      GST     Gross
ASSET               G       40,000    5,000    45,000
FINANCE             E      -40,500        0   -40,500


This records:
- the payment of the $4,500 deposit;
- the asset in the books at a purchase price of $40,000;
- the GST of $5,000, so we can claim it back (it will be in the next GST report);
- the liability to the finance company of $40,500 ($45,000 less the deposit), which needs to be paid off over time.

When you make a (normally monthly) payment to the finance company, part of it is interest and part of it is repayment of capital. The MoneyWorks entry (another cash payment, possibly recurring) will be along the following lines (you'd need to work out the mix of interest and principal repayments):

Code: Select all

Transaction Amt:   350
Acct          Tax Code         Net     GST     Gross
INT                 E          250       0       250
FINANCE             E          100       0       100

Note: The GST rate used in the example was the New Zealand rate of 12.5%.
The handling of GST in other countries may differ.
This is provided as example only -- you should check with your accountant.

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