Financial Accounting · Hire Purchase and Installment Sale Transactions

Default and Repossession of Goods in Hire Purchase

Updated 10 October 2026 · Fact-checked

When a hire purchaser stops paying installments, the vendor may take the goods back. Accounting starts by finding the amount due on the date of default, excluding interest not yet earned. The vendor records the goods at their agreed or valuation value and writes the shortfall off as loss. In partial repossession, apportion the dues to the goods taken.

Understand Default and Repossession of Goods

In a hire purchase, the buyer gets the goods and pays in installments, but ownership stays with the vendor until the last installment is paid. This is why the vendor can take the goods back if the buyer defaults. Default means the buyer fails to pay one or more installments on the due date.

On repossession, the buyer loses the goods and the vendor gets them back. The buyer's liability for the unpaid balance ends. Whether the buyer gets back any installments already paid depends on the agreement, so read the question. In most exam problems, the amounts already paid are not refunded.

The key figure is the amount due at the date of default. This is the cash price still unpaid plus interest that has accrued up to that date. Interest for the period after default has not been earned by the vendor. So the vendor takes it out of Interest Suspense, and it is never part of the loss.

The vendor then records the goods at the value given in the question, usually the agreed or valuation value, not the original cash price. The difference between the amount due and this value is the loss on repossession. The buyer works with his own figure: the written-down value of the asset against the liability cleared.

In partial repossession, the vendor takes back only some of the items. You must find the part of the amount due that relates to those items, and close only that part. The buyer keeps the other items and continues to owe the rest. If the vendor repairs and resells the goods, a separate Goods Repossessed Account shows the profit or loss on resale.

Key rules to remember

Amount due at default (buyer's liability): Cash price − down payment − principal already repaid + interest accrued but unpaid; Same as: unpaid installments − interest not yet accrued. Check it against the Hire Vendor Account balance.
Book value of asset in buyer's books: Cash price − depreciation charged up to the date of default; Charge depreciation and interest up to the date of default first, then close the accounts.
Buyer's gain or loss on surrender: Book value of asset − Hire Vendor balance cleared; If book value is higher, it is a loss. If lower, it is a gain.
Vendor's loss on repossession: Amount due (excluding unearned interest) − value of goods repossessed; Unearned interest comes from Interest Suspense and is not part of the loss.
Share of dues for partly repossessed goods: Total amount due × cash price of repossessed items ÷ total cash price of all items; Use this when the question gives no other basis. If the question gives a different basis, follow it.
Profit or loss on resale: Sale proceeds − (repossession value + repair and other costs); Shown in Goods Repossessed Account and transferred to the Profit and Loss Account.

How to solve Default and Repossession of Goods questions

This method works for full or partial repossession, and for either the buyer's or the vendor's books.

1Read the question for the cash price, down payment, installment dates, interest in each installment and the date of default. Note which books you must write.
2Bring the accounts up to the date of default: charge depreciation and interest due up to that date.
3Work out the amount due at default from the Hire Vendor Account, or from the unpaid installments less the interest not yet accrued.
4If only some items are taken, apportion the amount due, the book value and the unearned interest to those items. Use the cash price ratio unless told otherwise.
5Buyer's books: debit Hire Vendor with the amount cleared, credit the Asset Account with book value, and take the difference to the Profit and Loss Account.
6Vendor's books: debit Goods Repossessed at the agreed value, debit Interest Suspense with unearned interest, debit Profit and Loss with the loss, and credit Hire Purchaser with the unpaid installments.
7If the goods are repaired and sold, debit repair costs to Goods Repossessed Account, credit it with sale proceeds and transfer the balance to Profit and Loss.
8Check that debits equal credits and that the loss equals the amount due minus the value of goods taken.

Quickest way: Loss in one line, then the entry

When to use it: Use when the question asks only for the loss on repossession or a single journal entry, and time is short.

Write the unpaid installments from the default onwards. This is the Hire Purchaser balance in the vendor's books.
Subtract the interest not yet accrued. The result is the amount due.
Subtract the value at which the goods are taken back. The result is the vendor's loss.
Make the entry: Goods Repossessed Dr, Interest Suspense Dr, Profit and Loss Dr; Hire Purchaser Cr.
For partial repossession, multiply the unpaid installments, the interest and the amount due by the same fraction (cash price of items taken ÷ total cash price) before step 3.

Common mistakes in Default and Repossession of Goods

Treating all unpaid installments, including future interest, as the loss base.
Students see the Hire Purchaser balance and forget it contains interest the vendor has not earned.
Fix: Take unearned interest out through Interest Suspense. Loss = amount due − value of goods taken.
Using the original cash price instead of the book value in the buyer's books.
The cash price is the first number in the question, so it gets used out of habit.
Fix: Deduct depreciation up to the date of default and credit the Asset Account with the written-down value.
Closing the accounts without charging depreciation and interest for the last period.
The default happens at year end, so students treat the books as already complete.
Fix: First pass the entries for interest due and depreciation up to the default date, then pass the repossession entry.
In partial repossession, writing off the whole liability or the whole asset.
Students copy the full repossession entry without noticing that only some items were taken.
Fix: Apportion the amount due, interest suspense and book value to the items taken. The buyer keeps the rest in the books.
Ignoring repair costs when finding the profit or loss on resale.
Students compare sale price directly with the repossession value.
Fix: Add repairs to the repossession value in Goods Repossessed Account before comparing with sale proceeds.
Mixing the buyer's and vendor's figures in one entry.
The buyer's book value and the vendor's repossession value are different and both appear in the question.
Fix: Write the party's name above each entry. The buyer uses his book value. The vendor uses the repossession value.

Worked examples

Example 1

Ravi Traders bought a machine from Sharma Machines Ltd on hire purchase on 1 April 2024. Cash price ₹1,00,000. ₹10,000 was paid on signing. The balance is payable in three annual installments of ₹34,000 on 31 March 2025, 2026 and 2027. Interest included is ₹6,000, ₹4,000 and ₹2,000 respectively. Ravi charges depreciation at 20% p.a. on the written-down value. He paid the first installment but defaulted on the second. On 31 March 2026 Sharma repossessed the machine, valuing it at ₹50,000. Sharma spent ₹2,000 on repairs and resold it for ₹55,000. Pass the entries in both sets of books.

Show the solution

Ravi's liability: balance after down payment = ₹1,00,000 − ₹10,000 = ₹90,000. At 31 March 2025: 90,000 + 6,000 interest − 34,000 paid = ₹62,000. At 31 March 2026: 62,000 + 4,000 interest = ₹66,000 due.
Ravi's machine: depreciation year 1 = 20% of 1,00,000 = ₹20,000, so WDV ₹80,000. Year 2 = 20% of 80,000 = ₹16,000, so WDV ₹64,000.
Ravi's entries: Interest Dr ₹4,000 to Sharma Machines (Hire Vendor) ₹4,000. Depreciation Dr ₹16,000 to Machinery ₹16,000.
Ravi's repossession entry: Sharma Machines Dr ₹66,000; to Machinery ₹64,000; to Profit and Loss (gain on surrender) ₹2,000.
Sharma's books: unpaid installments = 34,000 + 34,000 = ₹68,000. After the year-end transfer of year 2 interest, Interest Suspense holds ₹2,000 of unearned interest. Amount due = 68,000 − 2,000 = ₹66,000. Loss = 66,000 − 50,000 = ₹16,000.
Sharma's entry: Goods Repossessed Dr ₹50,000; Interest Suspense Dr ₹2,000; Profit and Loss Dr ₹16,000; to Ravi (Hire Purchaser) ₹68,000. Check: 50,000 + 2,000 + 16,000 = 68,000.
Repairs: Goods Repossessed Dr ₹2,000 to Cash ₹2,000. Cost of goods now = 50,000 + 2,000 = ₹52,000.
Resale: Cash Dr ₹55,000 to Goods Repossessed ₹55,000. Balance in Goods Repossessed = 55,000 − 52,000 = ₹3,000 profit, transferred to Profit and Loss.

Answer: Ravi's liability of ₹66,000 is cleared against machine WDV of ₹64,000, giving him a gain of ₹2,000. Sharma's loss on repossession is ₹16,000, and the profit on resale is ₹3,000.

Example 2

Meena Industries bought three machines A, B and C from Kapoor Engineering on hire purchase on 1 April 2024. Cash prices: A ₹50,000, B ₹40,000, C ₹30,000 (total ₹1,20,000). ₹30,000 was paid on signing. The balance is payable in three annual installments of ₹40,000 on 31 March 2025, 2026 and 2027. Interest included is ₹15,000, ₹10,000 and ₹5,000. Meena charges depreciation at 10% p.a. on original cost. She paid the first installment but defaulted on the second. On 31 March 2026 Kapoor repossessed machine C only, valuing it at ₹14,000. The dues are apportioned in the ratio of cash prices. Pass the repossession entries in both sets of books.

Show the solution

Meena's liability: after down payment = 1,20,000 − 30,000 = ₹90,000. At 31 March 2025: 90,000 + 15,000 − 40,000 = ₹65,000. At 31 March 2026: 65,000 + 10,000 interest = ₹75,000 due on all three machines.
Ratio of cash prices A : B : C = 50 : 40 : 30 = 5 : 4 : 3. Share of C = 3/12 = 25%.
Amount due for C = 75,000 × 25% = ₹18,750.
Book value of C: cost ₹30,000; depreciation for two years = 10% of 30,000 × 2 = ₹6,000; WDV = ₹24,000.
Meena's entry (after charging interest and depreciation for the year): Kapoor Engineering Dr ₹18,750; Profit and Loss (loss) Dr ₹5,250; to Machine C ₹24,000. Check: 18,750 + 5,250 = 24,000. Machines A and B stay in the books and the balance ₹56,250 (75,000 − 18,750) remains payable.
Kapoor's books: unpaid installments = 40,000 + 40,000 = ₹80,000. Interest Suspense balance (year 3 interest) = ₹5,000. C's share: 80,000 × 25% = ₹20,000 and 5,000 × 25% = ₹1,250.
Amount due for C in Kapoor's books = 20,000 − 1,250 = ₹18,750. Loss = 18,750 − 14,000 = ₹4,750.
Kapoor's entry: Goods Repossessed Dr ₹14,000; Interest Suspense Dr ₹1,250; Profit and Loss Dr ₹4,750; to Meena (Hire Purchaser) ₹20,000. Check: 14,000 + 1,250 + 4,750 = 20,000.

Answer: Meena records a loss of ₹5,250 on machine C and still owes ₹56,250 on A and B. Kapoor records goods repossessed at ₹14,000 and a loss of ₹4,750.

Exam tips

Draw the Hire Vendor Account (buyer) or Hire Purchaser Account (vendor) first. Most numbers you need come from its closing balance.
Write the party's name above each journal entry. Examiners give step marks for the correct entry even if one figure is off.
In partial repossession, show the apportionment ratio and fraction clearly as a working note. This earns marks even when a later figure is wrong.
For MCQs, ask whether the question wants the amount due or the loss. Compute the amount due first, then subtract the repossession value only if loss is asked.
Check whether the question gives the repossession value, a valuation, or says nothing. If a value is given, use it. Never use the original cash price as the repossession value.

Practice questions from Hire Purchase and Installment Sale Transactions

Default and Repossession of Goods: frequently asked questions

What is the entry on repossession of goods in the vendor's books?

Debit Goods Repossessed Account with the value of goods taken, debit Interest Suspense with unearned interest and debit Profit and Loss with the loss. Credit the Hire Purchaser with the unpaid installments. The debit total must equal the credit.

How do you calculate loss on repossession in hire purchase?

Take the amount due at default, which is unpaid installments minus interest not yet earned. Subtract the value at which the goods are taken back. The difference is the vendor's loss.

What happens to the installments the buyer already paid?

In most exam problems they are not refunded and stay as the vendor's income or part payment already received. Read the question, as the agreement may provide otherwise, and follow what it says.

How do you handle partial repossession in hire purchase?

Find the share of the amount due, unearned interest and book value that belongs to the repossessed items. Use the ratio of cash prices unless the question gives another basis. Close only that share. The buyer continues to show the other items and the remaining liability.