This article demonstrates how you can record a hire purchase transaction of an asset with monthly instalment.
- 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 setup a monthly Recurring Instruction for the Money Out transaction to automate the creation of Money Out transaction.