Financial Accounting · Hire Purchase and Installment Sale Transactions

Hire Purchase Accounting: Cash Price Method

Updated 10 October 2026 · Fact-checked

Under the cash price method, the hirer debits the asset with the full cash price and credits the vendor. Each year, interest on the outstanding balance is credited to the vendor and charged to Profit and Loss. Payments are debited to the vendor, and depreciation is charged on the asset. The interest suspense method records total interest at the start and releases it yearly.

Understand Hire Purchase Accounting: Asset Accrued Method

In hire purchase, the buyer (hirer) takes the goods now and pays in installments. Ownership passes to the hirer only after the last installment is paid. Even so, the hirer uses the asset from day one, so the books show it from day one.

Each installment has two parts: the cash price part (the installment less interest) and the interest part. Interest is the cost of paying late. It is an expense, not part of the asset cost.

There are two standard ways to record this in the hirer's books.

Cash price method

On the date of purchase, debit the Asset account with the full cash price and credit the Vendor account.
Debit the Vendor account with the down payment and each installment paid.
At each year end, credit the Vendor account with interest due for the year and debit the Interest account. Transfer the interest to Profit and Loss.
Charge depreciation on the asset (at the full cash price, or on the written down value, as the question says) and transfer it to Profit and Loss.
The balance of the Vendor account at the year end is the liability shown in the Balance Sheet. The asset is shown at cost less depreciation.

Interest suspense method

Debit the Asset account with the cash price. Debit Interest Suspense with the total interest over the whole period. Credit the Vendor with the total of cash price and total interest, which equals the total payments.
Debit the Vendor with each payment.
Each year, transfer that year's interest from Interest Suspense to the Interest account, and from there to Profit and Loss.
In the Balance Sheet, the Vendor balance is shown as a liability and the balance in Interest Suspense is deducted from it.

Both methods give the same Profit and Loss charge each year. They differ only in how the liability is shown. Interest is calculated on the outstanding cash price balance, so the down payment, paid at the start, carries no interest by itself because the balance starts after it.

Key rules to remember

Interest on outstanding balance: Interest = Cash price balance outstanding at start of period × Rate × Time; Use the balance after the previous payment. The down payment is paid at the start, so interest runs on the balance after it.
Cash price part of an installment: Cash price part = Installment − Interest; This reduces the outstanding cash price balance.
Total interest: Total interest = Total of all payments − Cash price; Used in the interest suspense method and to cross-check your table.
Vendor balance (cash price method): Closing vendor balance = Opening balance + Interest for the year − Payments in the year; At the start the opening balance is the cash price less the down payment.
Depreciation: Depreciation = Rate × Cost (straight line) or Rate × Written down value (reducing balance); Follow the question. The base is the cost of the asset, which is the full cash price.
Interest suspense balance: Interest Suspense balance = Total interest − Interest transferred to Interest A/c so far; Deduct this from the Vendor balance in the Balance Sheet.

How to solve Hire Purchase Accounting: Asset Accrued Method questions

Use this order for any hire purchase question on the cash price or interest suspense method. It keeps cash price and interest separate, which is where the marks are.

1Note the cash price, down payment, installment amounts, due dates, interest rate, depreciation rate and method, and the year end date.
2Prepare a working table: opening outstanding cash price, interest, installment paid, cash price part, closing outstanding.
3Compute interest on the opening outstanding balance after the down payment. If the last installment is not given, find it as the balance plus interest.
4Open the Asset account with the full cash price.
5Write the Vendor account: debit payments, credit the cash price on purchase and the interest for each year. The balance c/d is the liability.
6Write the Interest account: debit interest, credit transfer to Profit and Loss. In the suspense method, show the Interest Suspense account as well.
7Charge depreciation on the base the question states and show the closing asset value.
8Check that the vendor balance is nil after the last installment and that total interest equals total payments less cash price.

Quickest way: Table first, accounts second

When to use it: Use when the question gives several installments and asks for ledger accounts across two or three years.

Draw one table with columns: date, outstanding cash price, interest, installment, cash price part, closing balance.
Fill the table fully before writing any account.
Post interest to the Interest account and the Vendor account directly from the table.
Compute depreciation year by year on the stated base and carry the net figure forward.
Cross-check that total interest equals total payments less cash price, and that the final balance is nil.

Common mistakes in Hire Purchase Accounting: Asset Accrued Method

Debiting the Asset account only with the amounts paid.
Students think of the asset as owned only when fully paid.
Fix: Under the cash price method, debit the full cash price to the Asset account on the date of purchase and credit the vendor.
Charging interest on the total cash price every year.
Students ignore that the balance reduces after each payment.
Fix: Calculate interest on the cash price balance outstanding after the previous payment.
Including interest in the cost of the asset.
The installment is treated as the cost.
Fix: The asset is recorded at cash price only. Interest goes to Profit and Loss.
Omitting the vendor liability in the Balance Sheet.
Students focus on the asset and forget the unpaid amount.
Fix: Show the vendor balance as a liability. In the suspense method, deduct the Interest Suspense balance from it.
Charging depreciation on the amount paid so far.
Depreciation base is confused with the payments made.
Fix: Depreciate the asset on its cost (full cash price) or written down value, as the question states.
Taking the whole installment to Interest or to the Asset account.
The split is skipped to save time.
Fix: Always split each installment into cash price part and interest in your working table.

Worked examples

Example 1

On 1 January 2025, Sharma Traders bought a machine on hire purchase from Kapoor Machines. Cash price ₹1,00,000. Payment: ₹40,000 down on 1 January 2025, ₹36,000 on 31 December 2025 and ₹33,000 on 31 December 2026. Interest is 10% p.a. on the outstanding balance. Books are closed on 31 December. Depreciation is 10% p.a. on the written down value. Using the cash price method, show the 2025 accounts.

Show the solution

Cash price ₹1,00,000. Debit the Machine account ₹1,00,000 and credit Kapoor Machines ₹1,00,000.
Down payment ₹40,000 on 1 January 2025. Outstanding cash price = ₹1,00,000 − ₹40,000 = ₹60,000.
Interest for 2025 = ₹60,000 × 10% = ₹6,000.
Installment on 31 December 2025 = ₹36,000. Cash price part = ₹36,000 − ₹6,000 = ₹30,000. Outstanding = ₹60,000 − ₹30,000 = ₹30,000.
Kapoor Machines account: credit cash price ₹1,00,000 and interest ₹6,000. Debit down payment ₹40,000 and installment ₹36,000. Balance c/d = ₹1,06,000 − ₹76,000 = ₹30,000.
Depreciation 2025 = 10% of ₹1,00,000 = ₹10,000. Closing book value = ₹1,00,000 − ₹10,000 = ₹90,000.
Profit and Loss charge for 2025 = interest ₹6,000 + depreciation ₹10,000 = ₹16,000.

Answer: Machine: cost ₹1,00,000, depreciation ₹10,000, closing value ₹90,000. Kapoor Machines owed at 31 December 2025: ₹30,000 (liability). Profit and Loss: interest ₹6,000 and depreciation ₹10,000.

Example 2

Using the data of the previous example, show the 2026 accounts under the cash price method.

Show the solution

Opening balance due to Kapoor Machines = ₹30,000.
Interest for 2026 = ₹30,000 × 10% = ₹3,000.
Installment on 31 December 2026 = ₹33,000. Cash price part = ₹33,000 − ₹3,000 = ₹30,000. This equals the outstanding cash price, so it is cleared.
Kapoor Machines account: opening balance ₹30,000 plus interest ₹3,000 = ₹33,000. Debit payment ₹33,000. Closing balance = nil.
Depreciation 2026 = 10% of written down value ₹90,000 = ₹9,000. Closing book value = ₹90,000 − ₹9,000 = ₹81,000.
Profit and Loss charge for 2026 = interest ₹3,000 + depreciation ₹9,000 = ₹12,000.
Check: total payments ₹40,000 + ₹36,000 + ₹33,000 = ₹1,09,000. Less cash price ₹1,00,000 = ₹9,000. Interest ₹6,000 + ₹3,000 = ₹9,000. It agrees.

Answer: At 31 December 2026 the vendor is fully paid and no liability remains. Machine closing value ₹81,000 after depreciation ₹9,000. Profit and Loss: interest ₹3,000 and depreciation ₹9,000.

Exam tips

Write the working table first. Examiners give step marks for the split of cash price and interest, even if a later figure is wrong.
Check the depreciation instruction word by word: straight line on cost or reducing balance on written down value.
Always check that the vendor balance is nil after the last installment. If it is not, your interest or installment is wrong.
In theory questions, state the difference between the cash price method and the interest suspense method in two or three points: how interest is recorded at the start, the vendor account total and the Balance Sheet presentation.
In MCQs, the usual trap is the interest amount. Compute it on the outstanding balance, not on the total price.

Practice questions from Hire Purchase and Installment Sale Transactions

Hire Purchase Accounting: Asset Accrued Method: frequently asked questions

What is the cash price method in hire purchase?

The hirer records the asset at the full cash price and credits the vendor on the date of purchase. Interest is calculated each year on the outstanding balance, credited to the vendor and charged to Profit and Loss. Installments are debited to the vendor.

How is the interest suspense method different?

The total interest for the whole period is recorded at the start in an Interest Suspense account, and the vendor is credited with cash price plus total interest. Each year the interest for that year is moved from the suspense account to Profit and Loss. The suspense balance is deducted from the vendor liability in the Balance Sheet.

Is interest included in the asset value?

No. The asset is recorded at the cash price. Interest is an expense and goes to Profit and Loss.

On what amount is depreciation charged?

Depreciation is charged on the cost of the asset, which is the full cash price, or on its written down value if the question says so. Always follow the instruction in the question.