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Financial Accounting · Hire Purchase and Installment Sale Transactions

Hire Purchase Stock and Debtors System for Small Value Items

Updated 10 October 2026 · Fact-checked

The stock and debtors system records many low-value hire purchase sales using four accounts: Hire Purchase Stock, Hire Purchase Debtors, Goods Sent on Hire Purchase and Hire Purchase Adjustment. Stock and debtors are kept at hire purchase price. The loading (profit) is removed through a stock reserve. To solve, find the loading, build the accounts, then compute profit.

Understand Hire Purchase Transactions of Items of Small Value

When a dealer sells many small items like fans, mixers or watches on hire purchase, opening a separate account for each item and customer is not practical. Such sales are therefore not tracked item by item. The dealer instead keeps a few summary accounts for the whole hire purchase business. This is the stock and debtors system.

The hire purchase price (HP price) is cost plus profit, and often plus interest. In this system everything is recorded at HP price. The part of HP price that is profit is called loading. Because loading on unsold stock and unpaid instalments is not yet earned, it must be held back as a stock reserve at the year end.

The four accounts work like this. Goods Sent on Hire Purchase A/c is credited with the HP price of goods sent out (the debit goes to HP Stock). At the year end it is cleared: cost goes to the Trading Account and loading goes to the HP Adjustment Account. HP Stock A/c holds goods still at the shop, at HP price. When goods are sold to customers, HP Stock is credited and HP Debtors is debited. HP Debtors A/c shows what customers still owe: instalments received reduce it. HP Adjustment A/c collects the loading, adjusts the stock reserve and shows the profit on hire purchase business, which goes to the Profit and Loss Account.

The key link to remember is this. Profit is earned only when cash is collected. So the balance of HP Adjustment A/c, after the loading on any stock lost has been debited to it, equals the loading on cash received. The cost of any stock lost is charged separately to the Profit and Loss Account. If your HP Adjustment A/c balance does not agree with this logic, something is wrong.

There is also a second approach, a Hire Purchase Trading Account, sometimes shown as a memorandum. It works at cost. It brings in opening stock at the shop and with customers (unpaid balances at cost), goods sent at cost, and cash received, and it ends with closing stock at the shop and with customers at cost. The balancing figure is the profit. It must agree with the answer from the ledger accounts.

Key rules to remember

HP price and cost
HP price = Cost + Loading
If goods are sold at cost plus 25%, HP price = 125% of cost, so loading = 25 ÷ 125 = 1/5 of HP price and cost = 4/5 of HP price.
Loading fraction on cost basis
Loading as a fraction of HP price = x ÷ (100 + x), where x is profit as % on cost
If profit is given as % on HP price, the loading fraction is simply that percentage.
Goods sold to customers (HP price)
Opening HP Stock + Goods sent − Closing HP Stock − Stock lost or damaged
This is the credit side of HP Stock A/c and the debit of HP Debtors A/c. Add goods returned or repossessed where relevant.
Closing HP Debtors
Opening debtors + Goods sold to customers − Cash received − Value of goods repossessed
Use HP price throughout. Cash received means instalments received.
Stock reserve
Stock reserve = Loading fraction × (Closing HP Stock + Closing HP Debtors)
Opening stock reserve is worked out the same way from opening balances. Only the difference affects profit.
Profit check
Balance of HP Adjustment A/c (after debiting loading on stock lost) = Loading fraction × Cash received. Cost of stock lost is charged to Profit and Loss A/c.
Use this to check the balancing figure in HP Adjustment A/c when there is no repossession. Net profit = this balance − cost of stock lost.
Cost of goods sent
Goods Sent on HP transferred to Trading A/c at cost = HP price × (1 − Loading fraction)
The loading goes to the credit of HP Adjustment A/c.

How to solve Hire Purchase Transactions of Items of Small Value questions

Use this order for any stock and debtors system question. Work in HP price first, and move to cost only where the question needs it.

  1. 1Find the loading fraction. If profit is on cost, use x ÷ (100 + x). If profit is on HP price, use it as given. Note the cost fraction too.
  2. 2Write opening balances of HP Stock and HP Debtors at HP price. Convert any figures given at cost to HP price.
  3. 3Prepare HP Stock A/c. Debit opening stock and goods sent (HP price). Credit closing stock and any stock lost. The balancing figure is goods sold to customers.
  4. 4Prepare HP Debtors A/c. Debit opening balance and goods sold (from the stock account). Credit cash received and goods repossessed. The balancing figure is closing debtors.
  5. 5Prepare Goods Sent on HP A/c. Transfer cost to the Trading Account and loading to HP Adjustment A/c.
  6. 6Calculate opening and closing stock reserve. For stock loss or repossession, remove the loading on the item lost.
  7. 7Prepare HP Adjustment A/c. Credit opening reserve and loading on goods sent. Debit closing reserve and loading on any loss. The balancing figure is profit on HP business, which goes to the Profit and Loss Account.
  8. 8Check: the HP Adjustment balance (after debiting loading on stock lost) should equal loading fraction × cash received. The cost of any stock lost is charged separately to Profit and Loss A/c. Show a note of this check if time permits.

Quickest way: Cash-based profit check with cost-basis trial

When to use it: Use it when the question asks only for profit on hire purchase, or when you want to verify a full ledger answer.

  1. Find the loading fraction from the profit rate.
  2. Multiply cash received during the year by the loading fraction. This is the profit realised, and it should equal the HP Adjustment A/c balance.
  3. If goods were lost, deduct the cost of the loss (HP price × cost fraction) to get net profit. Adjust separately for any repossession gain or loss.
  4. Confirm with the reserve movement: profit = opening reserve + loading on goods sent − loading on stock lost − closing reserve.
  5. If a full ledger is needed, still draw the accounts, but only after you know the target profit.

Common mistakes in Hire Purchase Transactions of Items of Small Value

  • Mixing cost and HP price figures in the same account

    Questions give some figures at cost and others at HP price, and students post them as given.

    Fix: Convert every figure to HP price before posting. Keep stock and debtors accounts fully at HP price.

  • Using the wrong loading fraction when profit is on cost

    Students take 25% of HP price instead of 25 ÷ 125.

    Fix: Treat cost as 100 and HP price as 100 + profit. Loading = profit ÷ HP price. Cost plus 25% gives 1/5 of HP price.

  • Forgetting to remove loading on stock lost or repossessed

    The stock loss is posted at HP price to the Profit and Loss Account.

    Fix: Charge only the cost of the lost goods to the Profit and Loss Account. Debit the loading to HP Adjustment A/c.

  • Calculating stock reserve on closing stock only

    Students forget that unpaid instalments also contain unearned loading.

    Fix: Apply the loading fraction to closing stock at the shop plus closing HP debtors. Do the same for opening reserve.

  • Posting the full HP price of goods sent to the Trading Account

    Goods Sent on HP A/c is treated like normal sales.

    Fix: Transfer only cost to the Trading Account and loading to HP Adjustment A/c. The two together equal HP price.

  • Treating closing stock with customers and debtors as separate items

    The words stock with customers and HP debtors look different in the question.

    Fix: In this system, goods with customers are represented by HP debtors. Do not add both.

Worked examples

Example 1

Sundaram Electricals sells small appliances on hire purchase at cost plus 25%. On 1 April 2026, HP Stock at the shop was ₹50,000 and HP Debtors were ₹80,000 (both at HP price). During the year, goods of HP price ₹3,00,000 were sent for hire purchase sale and ₹2,40,000 was collected from customers. On 31 March 2027, HP Stock at the shop was ₹60,000 (at HP price). Goods of HP price ₹5,000 were found missing at the shop. Prepare HP Stock A/c, HP Debtors A/c and HP Adjustment A/c, and find the profit on the hire purchase business after the stock loss.

Show the solution
  1. Loading fraction: cost plus 25% means HP price = 125. Loading = 25 ÷ 125 = 1/5 of HP price. Cost = 4/5 of HP price.
  2. HP Stock A/c: Debit opening stock ₹50,000 and goods sent on HP ₹3,00,000, total ₹3,50,000. Credit stock lost ₹5,000 and closing stock ₹60,000. Balancing figure credited to HP Debtors (goods sold to customers) = 3,50,000 − 5,000 − 60,000 = ₹2,85,000.
  3. HP Debtors A/c: Debit opening balance ₹80,000 and HP Stock ₹2,85,000, total ₹3,65,000. Credit cash ₹2,40,000. Closing balance = ₹1,25,000.
  4. Goods Sent on HP A/c: HP price ₹3,00,000. Cost to Trading A/c = 3,00,000 × 4/5 = ₹2,40,000. Loading to HP Adjustment A/c = ₹60,000.
  5. Stock lost: HP price ₹5,000. Cost = ₹4,000 to Profit and Loss A/c. Loading ₹1,000 debited to HP Adjustment A/c.
  6. Stock reserve, opening: (50,000 + 80,000) × 1/5 = ₹26,000. Closing: (60,000 + 1,25,000) × 1/5 = 1,85,000 × 1/5 = ₹37,000.
  7. HP Adjustment A/c: Credit side: opening reserve ₹26,000, loading on goods sent ₹60,000, total ₹86,000. Debit side: stock lost (loading) ₹1,000, closing reserve ₹37,000, total ₹38,000. Balancing figure, profit transferred to Profit and Loss A/c = 86,000 − 38,000 = ₹48,000.
  8. Check: loading on cash received = 2,40,000 × 1/5 = ₹48,000. The total loading of ₹86,000 is made up of ₹48,000 on cash received, ₹1,000 on stock lost and ₹37,000 in closing reserve (48,000 + 1,000 + 37,000 = 86,000). The ₹1,000 is already debited in the account, so the balance of ₹48,000 agrees with the loading on cash received.
  9. Cost of the stock lost, ₹4,000, is charged separately to Profit and Loss A/c. Net profit after stock loss = 48,000 − 4,000 = ₹44,000.

Answer: HP Debtors on 31 March 2027 are ₹1,25,000. Goods sold to customers at HP price are ₹2,85,000. Closing stock reserve is ₹37,000. Profit on HP business transferred from HP Adjustment A/c is ₹48,000, after debiting ₹1,000 loading on the lost stock. After charging the ₹4,000 cost of the stock lost to Profit and Loss A/c, the net profit is ₹44,000.

Example 2

Kaveri Traders sells small items on hire purchase at cost plus 50%. HP Stock at the shop on 1 April 2026 was ₹36,000 and HP Debtors were ₹60,000 (both at HP price). During the year, goods of HP price ₹1,50,000 were sent out on hire purchase and ₹1,20,000 was received from customers. HP Stock at the shop on 31 March 2027 was ₹30,000 at HP price. There was no stock loss. Prepare the Hire Purchase Trading Account (at cost) and find the profit.

Show the solution
  1. Loading fraction: 50 ÷ 150 = 1/3 of HP price. Cost = 2/3 of HP price.
  2. Goods sold to customers at HP price = 36,000 + 1,50,000 − 30,000 = ₹1,56,000.
  3. Closing HP Debtors = 60,000 + 1,56,000 − 1,20,000 = ₹96,000.
  4. Convert to cost (× 2/3): opening stock at shop 36,000 × 2/3 = ₹24,000. Opening debtors 60,000 × 2/3 = ₹40,000. Goods sent 1,50,000 × 2/3 = ₹1,00,000. Closing stock at shop 30,000 × 2/3 = ₹20,000. Closing debtors 96,000 × 2/3 = ₹64,000.
  5. Hire Purchase Trading Account, debit side: opening stock at shop ₹24,000, opening stock with customers ₹40,000, goods sent ₹1,00,000, total ₹1,64,000 before profit.
  6. Credit side: cash received ₹1,20,000, closing stock at shop ₹20,000, closing stock with customers ₹64,000, total ₹2,04,000.
  7. Profit = 2,04,000 − 1,64,000 = ₹40,000.
  8. Check: loading × cash received = 1/3 × 1,20,000 = ₹40,000. This agrees.

Answer: Profit on the hire purchase business is ₹40,000. Closing HP Debtors are ₹96,000 at HP price, or ₹64,000 at cost.

Exam tips

  • Write the loading fraction at the top of your answer and use it throughout. Examiners award step marks for the correct fraction.
  • Always show the balancing figures in the HP Stock and HP Debtors accounts with clear labels, such as Goods sold to customers.
  • State clearly whether each figure is at HP price or at cost. A one-line note earns marks even if a calculation slips.
  • Show the profit check (loading × cash received) as a working note when time allows. It proves your adjustment account is correct.
  • In MCQs, usually only the loading fraction or the stock reserve is tested. Calculate those first, and there is no negative marking, so always attempt every one.

Practice questions from Hire Purchase and Installment Sale Transactions

Hire Purchase Transactions of Items of Small Value: frequently asked questions

What is the stock and debtors system in hire purchase?

It is a method for businesses selling many low-value goods on hire purchase. Instead of individual customer accounts, the dealer keeps summary accounts: HP Stock, HP Debtors, Goods Sent on HP and HP Adjustment. All are kept at hire purchase price.

What is the Hire Purchase Adjustment Account used for?

It collects the loading (profit) on goods sent out and adjusts for the stock reserve at opening and closing. Any loading on stock lost is debited to it. Its balancing figure is the profit on hire purchase business, transferred to the Profit and Loss Account.

How do I find the loading when profit is given on cost?

Take cost as 100 and add the profit rate to get HP price. Loading is profit ÷ HP price. For cost plus 25%, loading is 25 ÷ 125, which is 1/5 of HP price.

Why is a stock reserve created in this system?

Loading on goods in the shop and on unpaid instalments has not yet been earned, because the cash is not collected. The stock reserve keeps this unearned profit out of the current year's profit and carries it to the next year.