This article demonstrates how you can record a hire purchase transaction of an asset with a monthly instalment.
Prerequisites
You are acquiring a motor vehicle that costs RM175,000.00 with a 5-year hire purchase plan.
You have put down a deposit/down payment of RM75,000.00, which means the financed amount is RM100,000.00.
The interest rate per annum is 3.88% flat, total hire purchase interest is RM19,400.00. (RM100,000 x 3.88% x 5 years)
Total hire purchase amount is RM119,400.00 (RM100,000 + RM19,400)
Your monthly instalment is RM1,990.00 over 5 years or 60 months. (RM119,400 / 60 months)
Monthly Breakdown:
Interest: RM323.33 (RM19,400 / 60 months)
Principal: RM1,666.67 (RM1,990 – RM323.33)
The total acquisition cost is RM194,400.00. (RM175,000 + RM19,400)
The following accounts are required, create the accounts if they’re missing from your Chart of Accounts.
Motor Vehicles – Cost (Fixed Assets / Non-Current Assets)
Hire Purchase (Current Liabilities)
Hire Purchase Interest in Suspense (Current Liabilities)
Hire Purchase Interest (Expenses)
Recording the Purchase.
Create a Purchase Bill with the following items and accounts.
Motor Vehicles – Cost: RM175,000.00
Hire Purchase Interest in Suspense: RM19,400.00
Hire Purchase: -RM119,400.00 (Financed amount + Interest amount)
Note: 1(c) reduces the amount payable by the total hire purchase amount and park it under the Hire Purchase (Liabilities) account.
Recording the Payment for Down Payment.
Create a Purchase Payment with the same supplier.
Amount RM75,000.00 from your bank account.
Apply all credits to the original bill.
Recording the Payment for Monthly Instalment.
Create a Money Out transaction.
Amount RM1,990.00 from your bank account.
Enter the following items and accounts:
Hire Purchase: RM1,990.00
Hire Purchase Interest: RM323.33
Hire Purchase Interest in Suspense: -RM323.33
Note: 3(b)&(c) realises the monthly HP interest expenses by moving the amount from the suspense account (Liabilities).
Pro-Tip: You can set up a monthly Recurring Instruction for the Money Out transaction to automate the creation of Money Out transaction.