Operation of Hire Purchase System - SS3 Accounting Lesson Note

The hire purchase system is a method of financing the purchase of an asset, such as a car or furniture, where the buyer makes regular installment payments over a period of time to the seller. The buyer does not own the asset until all payments, including any final balloon payment, have been made.

The process begins with the buyer and the seller agreeing on the purchase price, the deposit amount, and the terms of the hire purchase agreement. 

The buyer pays the deposit, which is usually a percentage of the purchase price, and then makes regular instalment payments to the seller over the term of the agreement.

The instalment payments include both the principal amount and the interest charged by the seller on the outstanding balance of the purchase price.

During the term of the agreement, the seller retains ownership of the asset, but the buyer has possession and use of the asset. Once all payments, including any final balloon payment, have been made, the ownership of the asset transfers from the seller to the buyer.

If the buyer fails to make the required payments, the seller may terminate the hire purchase agreement and repossess the asset. In such a case, the buyer will not be entitled to any refund for the payments made prior to the termination of the agreement.