Before learning the accounting entries, understand these important terms:

• Hire Vendor: The seller who delivers assets to the hire purchaser under the agreement.
• Hire Purchaser: The buyer who obtains the right to use the asset but not ownership until final payment.
• Cash Price: The amount payable if purchased immediately in cash.
• Hire Purchase Price: Total amount payable (cash price + interest).
• Hire Purchase Interest: Extra amount paid for the convenience of paying later.
• Down Payment: Initial payment made when signing the agreement.
• Instalment: Regular payment made over the agreed period.

When a student prepares records in the books of the hire purchaser, the following steps apply:

Step 1: Recording the Asset Acquisition

The asset is recorded at its cash price (not the hire purchase price). This is because the asset is being financed through instalments, and the interest is a financing cost.

Journal Entry:

Dr Asset Account (with cash price)
   Cr Hire Vendor Account

Step 2: Recording Down Payment

When the initial payment is made:

Dr Hire Vendor Account
   Cr Bank/Cash Account

Step 3: Recording Interest on Instalments

When an instalment becomes due, the interest portion is recognized:

Dr Hire Purchase Interest Account
   Cr Hire Vendor Account

Step 4: Recording Instalment Payment

When paying the instalment:

Dr Hire Vendor Account
   Cr Bank/Cash Account

Step 5: Recording Depreciation

The asset is depreciated based on its cash price:

Dr Depreciation Expense Account
   Cr Accumulated Depreciation Account

Step 6: Closing to Profit or Loss

At period end, interest and depreciation are transferred:

Dr Profit or Loss Account
   Cr Interest Account
   Cr Depreciation Account

The hire vendor records the transaction differently:

Step 1: Recording the Sale

The vendor records the sale at cash price:

Dr Hire Purchaser Account
   Cr Hire Purchase Sales Account

Step 2: Recording Down Payment Received

Dr Bank/Cash Account
   Cr Hire Purchaser Account

Step 3: Recording Interest when Due

Dr Hire Purchaser Account
   Cr Hire Purchase Interest Account

Step 4: Recording Instalment Received

Dr Bank/Cash Account
   Cr Hire Purchaser Account

Step 5: Closing Entries

At period end:

Dr Hire Purchase Sales Account
   Cr Trading Account

Dr Hire Purchase Interest Account
   Cr Profit or Loss Account

On 1 January 2024, Mwanza Traders purchased a machine from Dar Equipment Ltd on hire purchase with these terms:

• Cash price: TZS 10,000,000
• Down payment: TZS 2,000,000
• Hire purchase price: TZS 12,000,000
• Interest rate: 10% per annum
• Three annual instalments of TZS 4,000,000 each
• Depreciation: 10% per annum (straight-line)

Required: Prepare the relevant accounts in the books of Mwanza Traders for 2024.

Solution

Step 1: Calculate interest Total interest = Hire purchase price - Cash price = TZS 12,000,000 - TZS 10,000,000 = TZS 2,000,000

Interest per year (straight-line) = TZS 2,000,000 ÷ 3 = TZS 666,667 (approximately)

Step 2: Prepare the ledger accounts

Machine Account (at cash price TZS 10,000,000)

Dar Equipment Ltd Account

Hire Purchase Interest Account

Depreciation Account

Provision for Depreciation Account

1. Always record the asset at cash price in the hire purchaser's books, not at the hire purchase price.

2. Interest is calculated on the outstanding balance (cash price less down payment) using the agreed method.

3. Depreciation is charged on the cash price of the asset, not on the hire purchase price.

4. Separate accounts must be maintained for: the asset, the hire vendor, interest, and depreciation.

5. Classification in the statement of financial position: The portion due within one year is a current liability, and the portion due after one year is a non-current liability.

In Tanzania, small business owners in cities like Arusha or Dodoma often purchase equipment such as posho mills, welding machines, or motorcycles through hire purchase agreements from local suppliers. Understanding how to maintain hire purchase records helps a student whose parent runs a small shop to properly track instalment payments for a refrigerator or display freezer bought from a supplier, ensuring payments are recorded correctly and the asset value is properly shown in the business records.