Financial Accounting · Hire Purchase and Installment Sale Transactions

Hire Purchase Accounting: Full Cash Price Method

Updated 10 October 2026 · Fact-checked

Under the full cash price method, the hire purchaser records the asset at its full cash price on delivery and credits the hire vendor. Interest is booked separately at each year end as an expense. The whole installment is debited to the hire vendor, which reduces the balance owed, including accrued interest. Depreciation is charged on the cash price.

Understand Hire Purchase Accounting: Full Cash Price Method

In a hire purchase, you take the goods now, pay in installments, and become the owner only after the last installment. Each installment in effect covers two things: repayment of the cash price and interest for the credit period. You do not split it in the journal, though.

The full cash price method treats the deal as a purchase on credit with interest. On delivery, the purchaser debits the Asset Account with the full cash price and credits the Hire Vendor's Account with the same amount. The asset appears in the books at once, even though ownership has not passed. This is substance over form.

Interest is not part of the asset cost. It is an expense. At each year end the purchaser debits Interest Account and credits the Hire Vendor. Each installment paid is debited to the Hire Vendor. So the Hire Vendor's Account always shows what is still owed: cash price plus interest accrued less installments paid.

Depreciation is charged by the purchaser on the cash price, on the method given in the question (straight line or written down value). Both interest and depreciation go to the Profit and Loss Account.

The hire vendor does the mirror image. The vendor usually opens a Hire Purchaser's Account, debited with the cash price on delivery and with interest each year, and credited with installments received. Sales and interest income are recognised. If goods are sold at a profit over cost, the vendor books sales at cash price and the cost of goods sold separately.

There is a second approach, the asset accrued method, which has its own treatment of the asset and interest. It is a separate topic. Do not mix its entries with the ones on this page; use the method the question names.

Key rules to remember

Asset on delivery: Asset A/c Dr (full cash price) ; To Hire Vendor A/c; Record at cash price only. Down payment is not added to this entry.
Down payment: Hire Vendor A/c Dr ; To Bank A/c; Paid on signing; reduces the amount owed to the vendor.
Interest accrued: Interest A/c Dr ; To Hire Vendor A/c; Passed at each year end for the period.
Installment paid: Hire Vendor A/c Dr ; To Bank A/c; The whole installment is debited to the Hire Vendor; no split is needed in the journal. It reduces the balance owed, which is cash price plus interest accrued less payments made.
Depreciation: Depreciation A/c Dr ; To Asset A/c; Charged on cash price at the stated rate and method.
Closing balance of Hire Vendor: Cash price + total interest accrued − down payment and installments paid; Shown as liability in the Balance Sheet; split into current and non-current if asked.
Interest in an installment: Interest = Rate × opening outstanding balance × time; Outstanding balance is cash price less down payment and principal repaid so far. Use the last year's interest as the balancing figure only when the rate is not given or rounding leaves a difference.
Vendor's entries: Hire Purchaser A/c Dr (cash price) ; To Sales A/c. Then Interest accrued and installments received.; Mirror of purchaser's Hire Vendor account.

How to solve Hire Purchase Accounting: Full Cash Price Method questions

Use this order for any full cash price question, whether it asks for journals or ledger accounts.

1Note the cash price, down payment, number and amount of installments, interest rate, depreciation rate and the dates of payment and year end.
2Prepare a small schedule: opening balance, interest, installment, closing balance for each year. Interest is on the opening outstanding balance after the down payment.
3If the interest rate is given, compute each year's interest from it. If the rate is not given, find total interest as total payments less cash price, then spread it using the schedule. In either case, make the last year's interest the balancing figure only when the rate is not given or rounding leaves a difference.
4Pass the journal entries in order: acquisition, down payment, interest, installment, depreciation and transfers to Profit and Loss.
5Post to the Asset Account (cash price, less depreciation each year) and the Hire Vendor Account (installments and down payment on debit; cash price and interest on credit).
6Check that the Hire Vendor balance equals the outstanding principal at each year end, and is nil after the last installment.
7For the vendor, mirror the entries in Hire Purchaser's Account and compute profit or interest income as required.
8Show the Balance Sheet extracts: asset at cost less depreciation, and the Hire Vendor balance as liability.

Quickest way: Schedule first, ledgers second

When to use it: Use when the question asks for ledger accounts across two or three years and you have limited time.

Build the schedule: opening balance, interest, installment, closing balance, for each year.
Ledger of Hire Vendor: credit side has cash price and interest; debit side has down payment, installments and closing balance. Copy from the schedule.
Asset account: debit cash price, credit depreciation, carry down the written-down value.
Verify the closing Hire Vendor balance equals the last schedule closing figure. If the figures differ, recheck interest.
Write the P&L charge each year as interest plus depreciation.

Common mistakes in Hire Purchase Accounting: Full Cash Price Method

Recording the asset at total payments (cash price plus interest).
Students forget that interest is a finance expense, not part of cost.
Fix: Debit Asset only with the cash price. Debit interest to Interest Account.
Calculating interest on the full cash price every year.
The balance reduces with each installment but students do not update it.
Fix: Compute interest on the opening outstanding balance, after the down payment and principal already repaid.
Adding the down payment to the cash price in the asset entry.
The down payment is thought of as extra cost.
Fix: It is part of the cash price. Pay it by debiting the Hire Vendor.
Charging depreciation on the total of installments.
Confusion with the asset accrued method or with the amount paid.
Fix: Depreciate the cash price, using the rate and method given.
Leaving a small closing balance because of rounding in the last year's interest.
The interest rate is not given or the figures are rounded, so the schedule does not close to nil.
Fix: When the rate is not given or rounding leaves a difference, make the final year's interest the amount needed to clear the balance. If the rate is given and the figures are exact, recheck your calculation instead.
Showing a Hire Vendor balance that is not nil after the last installment.
Interest was computed wrongly in one of the years, so the schedule does not clear. No closing entry is needed, because the last installment itself clears the account.
Fix: Check the schedule: the opening balance, the interest for each year and the installments. Correct the error so the account closes to nil.

Worked examples

Example 1

On 1 April 2025, Sharma Traders bought a machine from Kapoor Machines on hire purchase. Cash price ₹1,00,000. Down payment ₹20,000 on 1 April 2025. Balance in two annual installments of ₹50,000 and ₹41,800, payable on 31 March 2026 and 31 March 2027. Interest is charged at 10% p.a. on the outstanding balance at the start of each year and is booked at each year end. Depreciation is 10% p.a. on straight line on cash price. Prepare the Machine Account and Kapoor Machines Account in Sharma Traders' books for two years.

Show the solution

Opening liability after down payment: ₹1,00,000 − ₹20,000 = ₹80,000.
Year 1: interest = 10% × ₹80,000 = ₹8,000. ₹80,000 + ₹8,000 = ₹88,000; less installment ₹50,000 = closing ₹38,000.
Year 2: interest = 10% × ₹38,000 = ₹3,800. ₹38,000 + ₹3,800 = ₹41,800; less installment ₹41,800 = closing nil.
Check: total payments are ₹20,000 + ₹50,000 + ₹41,800 = ₹1,11,800. Total interest is ₹1,11,800 − ₹1,00,000 = ₹11,800 = ₹8,000 + ₹3,800. This is consistent.
Machine A/c: 1 Apr 2025 debit ₹1,00,000 (credit Kapoor Machines). 31 Mar 2026 credit depreciation ₹10,000, balance c/d ₹90,000. Year 2: opening ₹90,000, depreciation ₹10,000, balance ₹80,000.
Kapoor Machines A/c, year 1: Dr 1 Apr 2025 bank ₹20,000 (down payment); Dr 31 Mar 2026 bank ₹50,000 (installment); Dr balance c/d ₹38,000. Cr 1 Apr 2025 machine ₹1,00,000; Cr 31 Mar 2026 interest ₹8,000. Both sides total ₹1,08,000.
Year 2: Dr 31 Mar 2027 bank ₹41,800. Cr balance b/d ₹38,000, interest ₹3,800. Both sides total ₹41,800. Closing balance nil.

Answer: Machine A/c shows written-down value ₹90,000 at 31 March 2026 and ₹80,000 at 31 March 2027. Kapoor Machines A/c has balance ₹38,000 on 31 March 2026 and nil on 31 March 2027.

Example 2

Mehta Ltd buys a vehicle on hire purchase from Nair Motors on 1 January 2026. Cash price ₹3,00,000. Payment: ₹1,00,000 down, and the balance in two annual installments of ₹1,20,000 and ₹1,10,000 on 31 December 2026 and 31 December 2027. The installments include interest at 10% p.a. on the outstanding balance. Pass journal entries for 2026 and 2027, and show the Hire Vendor balance at each year end. Ignore depreciation.

Show the solution

1 January 2026: Vehicle A/c Dr ₹3,00,000; To Nair Motors ₹3,00,000. Nair Motors A/c Dr ₹1,00,000; To Bank ₹1,00,000.
Outstanding after down payment: ₹2,00,000.
Interest for 2026 = 10% × ₹2,00,000 = ₹20,000. Entry: Interest A/c Dr ₹20,000; To Nair Motors ₹20,000.
Installment on 31 December 2026: Nair Motors A/c Dr ₹1,20,000; To Bank ₹1,20,000.
Balance at 31 December 2026 = ₹2,00,000 + ₹20,000 − ₹1,20,000 = ₹1,00,000.
Interest for 2027 = 10% × ₹1,00,000 = ₹10,000. Entry: Interest A/c Dr ₹10,000; To Nair Motors ₹10,000.
Installment on 31 December 2027: Nair Motors A/c Dr ₹1,10,000; To Bank ₹1,10,000.
Balance at 31 December 2027 = ₹1,00,000 + ₹10,000 − ₹1,10,000 = nil.
Check: total payments ₹1,00,000 + ₹1,20,000 + ₹1,10,000 = ₹3,30,000; cash price ₹3,00,000; total interest ₹30,000 = ₹20,000 + ₹10,000.

Answer: Hire Vendor balance is ₹1,00,000 on 31 December 2026 and nil on 31 December 2027. Interest charged is ₹20,000 in 2026 and ₹10,000 in 2027.

Exam tips

Draw the interest schedule first. Every ledger figure then comes from one table.
Write the cash price in the asset account on the date of delivery. Examiners award a step mark for this alone.
State depreciation on cash price, and show the rate and method in a working note.
In the vendor's books, mirror the purchaser: Hire Purchaser A/c Dr cash price, then interest, then receipts. Do not mix it with the asset accrued method.
MCQs often ask what the asset is recorded at, or what interest is calculated on. Answer: full cash price, and the outstanding balance.

Practice questions from Hire Purchase and Installment Sale Transactions

Hire Purchase Accounting: Full Cash Price Method: frequently asked questions

What is the full cash price method in hire purchase?

It records the asset at its full cash price on delivery and credits the hire vendor. Interest is booked as an expense each year. The vendor account therefore shows the real amount you still owe.

Is interest included in the asset cost?

No. The asset is recorded at cash price. Interest is a finance charge and goes to the Profit and Loss Account each year.

How is the down payment recorded?

It is part of the cash price. You debit the Hire Vendor Account and credit Bank. The asset entry is not changed.

How is the last year's interest found?

If the rate is given, compute it on the opening outstanding balance like any other year. If the rate is not given or rounding leaves a difference, subtract the cash price from total payments to get total interest. Then subtract the interest of earlier years. The remainder is the last year's interest, so the account clears to nil.