Hire Purchase Accounts in the Hirer’s Books for SS 3

Class: SS 3
Term: First Term
Week: 4
Age: 14 years
Duration: 45 minutes
Subject: Financial Accounting
Curriculum Theme: Financial Accounting Principles
Previous Lesson: Hire Purchase and Instalment Payment Accounts
Topic: HIRE PURCHASE ACCOUNT
Subject Matter: Preparation of hire purchase account; The hirer’s books; The vendor’s books

Specific Objectives

By the end of the lesson, pupils/students should be able to:

Cognitive Domain

• Define hire purchase.
• State the key features of a hire purchase agreement.
• Explain the accounting treatment of hire purchase in the hirer’s books.
• Identify the main accounts used in the hirer’s books for hire purchase.
• Explain the accounting treatment of hire purchase in the vendor’s books.

Psychomotor Domain

• Prepare journal entries for hire purchase transactions in the hirer’s books.
• Post hire purchase transactions to the relevant ledger accounts in the hirer’s books.
• Prepare simple ledger accounts for hire purchase in the vendor’s books.

Affective Domain

• Appreciate the importance of proper accounting for hire purchase transactions.
• Participate actively in group discussions on hire purchase accounting.

Reference Materials

The following resources were used in planning this lesson:

• 2025 Revised 9 Years Basic Education Curriculum
• Relevant State Unified Scheme of Work
• Financial Accounting for Senior Secondary Schools, Book 3
• The HeadTeacher Scheme of work

Instructional Materials

The teacher will teach this lesson with the aid of:

• Charts showing journal entries for hire purchase.
• Pictures illustrating goods bought on hire purchase.
• Sample invoice documents for hire purchase.
• Whiteboard and markers.

Rationale for the Lesson

Understanding hire purchase accounts is essential for students as it represents a common form of asset acquisition and sales in the business world. This lesson helps students develop practical accounting skills necessary for recording such transactions accurately. It also provides a foundation for advanced topics in financial reporting and analysis.

Prerequisite/Previous Knowledge

Students should have a basic understanding of accounting principles, journal entries, ledger accounts, depreciation, and the concept of credit sales and purchases.

Lesson Content/Board Summary

HIRE PURCHASE ACCOUNT

Meaning of Hire Purchase

Hire purchase is a transaction where goods are bought and sold on credit, with the buyer (hirer) paying for the goods in installments over an agreed period. Ownership of the goods typically transfers to the hirer only after the final installment is paid. Until then, the seller (vendor) retains legal ownership.

Key Features of Hire Purchase

1. The hirer takes possession of the goods immediately but does not become the owner until the last installment is paid.
2. The hirer pays a down payment (initial deposit) and subsequent installments.
3. Each installment includes a portion of the principal amount and an interest charge.
4. If the hirer defaults on payments, the vendor can repossess the goods.
5. The hirer has the option to return the goods before paying all installments, subject to certain conditions.

Accounting for Hire Purchase in the Hirer’s Books

In the hirer’s books, the asset acquired under hire purchase is treated as an asset from the date of acquisition, even though legal ownership is not yet transferred. The total cash price of the asset is debited to the Asset Account, and the hire purchase vendor is credited with the total amount payable (cash price + total interest).

Main Accounts in the Hirer’s Books

1. Asset Account: Debited with the cash price of the asset.
2. Hire Purchase Vendor Account: Credited with the total amount payable (cash price + total interest).
3. Interest Suspense Account: Debited with the total interest payable. This account is used to spread the interest expense over the period of the hire purchase agreement.
4. Depreciation Account: Debited with the annual depreciation charge on the asset.
5. Interest Expense Account (or Profit & Loss Account): Debited with the interest charged for the period.
6. Bank/Cash Account: Credited for down payments and installments paid.

Journal Entries in the Hirer’s Books

The following are typical journal entries:

1. For the acquisition of the asset:

   Debit: Asset Account (Cash Price)

   Debit: Interest Suspense Account (Total Interest)

   Credit: Hire Purchase Vendor Account (Total Amount Payable)

2. For the down payment:

   Debit: Hire Purchase Vendor Account

   Credit: Bank/Cash Account

3. For annual depreciation:

   Debit: Depreciation Account

   Credit: Accumulated Depreciation Account (or Asset Account)

4. For interest charged for the period:

   Debit: Interest Expense Account

   Credit: Interest Suspense Account

5. For installment payment:

   Debit: Hire Purchase Vendor Account

   Credit: Bank/Cash Account

6. At the end of the financial year (transfer of expenses):

   Debit: Profit & Loss Account

   Credit: Depreciation Account

   Credit: Interest Expense Account

Example: Hirer’s Books

A company acquired machinery on hire purchase on 1st January 2023. Cash price N500,000. Down payment N100,000. Three annual installments of N150,000 each, payable at the end of each year. Total interest is N50,000. Depreciation is 10% per annum on the cash price.

Journal Entries:

1. Jan 1, 2023: Acquisition of Machinery

   Debit: Machinery Account N500,000

   Debit: Interest Suspense Account N50,000

   Credit: HP Vendor Account N550,000

   (Being machinery acquired on hire purchase)

2. Jan 1, 2023: Down Payment

   Debit: HP Vendor Account N100,000

   Credit: Bank Account N100,000

   (Being down payment made to HP Vendor)

3. Dec 31, 2023: Depreciation for the year

   Debit: Depreciation Account N50,000 (10% of N500,000)

   Credit: Accumulated Depreciation Account N50,000

   (Being depreciation charged on machinery)

4. Dec 31, 2023: Interest charged for the year (N50,000 / 3 years = N16,667 approx)

   Debit: Interest Expense Account N16,667

   Credit: Interest Suspense Account N16,667

   (Being interest charged for the year)

5. Dec 31, 2023: First Installment Payment

   Debit: HP Vendor Account N150,000

   Credit: Bank Account N150,000

   (Being first annual installment paid)

Accounting for Hire Purchase in the Vendor’s Books

In the vendor’s books, the transaction is treated as a sale. The vendor will debit the hirer’s personal account with the total amount payable (cash price + total interest) and credit Hire Purchase Sales Account with the cash price and Interest Receivable Account with the total interest.

Main Accounts in the Vendor’s Books

1. Hirer’s Account: Debited with the total amount payable.
2. Hire Purchase Sales Account: Credited with the cash price of the goods sold.
3. Interest Receivable Suspense Account: Credited with the total interest to be received.
4. Goods on Hire Purchase Account: Credited with the cost of goods sold on hire purchase (if separate stock is maintained).
5. Profit & Loss Account: Credited with the gross profit on hire purchase sales and interest earned.
6. Bank/Cash Account: Debited for down payments and installments received.

Journal Entries in the Vendor’s Books

The following are typical journal entries:

1. For the sale of goods on hire purchase:

   Debit: Hirer’s Account (Total Amount Payable)

   Credit: Hire Purchase Sales Account (Cash Price)

   Credit: Interest Receivable Suspense Account (Total Interest)

2. For the down payment received:

   Debit: Bank/Cash Account

   Credit: Hirer’s Account

3. For cost of goods sold (if using a separate stock account):

   Debit: Cost of Hire Purchase Sales Account

   Credit: Goods on Hire Purchase Account

4. For interest earned for the period:

   Debit: Interest Receivable Suspense Account

   Credit: Interest Income Account

5. For installment received:

   Debit: Bank/Cash Account

   Credit: Hirer’s Account

6. At the end of the financial year (transfer of income):

   Debit: Hire Purchase Sales Account

   Credit: Trading Account (or Profit & Loss Account)

   Debit: Interest Income Account

   Credit: Profit & Loss Account

Teaching Methods/Instructional Techniques

Discussion, Explanation, Demonstration, Guided Practice, Question and Answer, Group Work

Instructional Procedures

Step 1: Introduction

Time: 5 minutes

Teaching Skill: Questioning/Recall

Teacher’s Activity: The teacher begins by asking students about their understanding of credit sales and installment payments, linking it to everyday scenarios. The teacher then introduces the concept of hire purchase.

Pupils’ Activity: Students respond to questions about credit sales and listen attentively to the introduction of hire purchase.

Learning Point: Prior knowledge activation

Step 2: Definition and Operation of Hire Purchase

Time: 8 minutes

Teaching Skill: Explanation/Illustration

Teacher’s Activity: The teacher defines hire purchase, explains its key features, and highlights the difference between the hirer and the vendor. The teacher uses charts and pictures to illustrate the concept.

Pupils’ Activity: Students listen, ask questions, and take short notes on the definition and operation of hire purchase.

Learning Point: Hire purchase definition

Step 3: Accounting Principles in the Hirer’s Books

Time: 7 minutes

Teaching Skill: Explanation/Analysis

Teacher’s Activity: The teacher explains how hire purchase transactions are treated in the hirer’s books, focusing on the recognition of the asset, liability, and interest. The teacher lists the main accounts involved.

Pupils’ Activity: Students listen and note down the accounting principles and main accounts for the hirer’s books.

Learning Point: Hirer’s accounting principles

Step 4: Journal Entries in the Hirer’s Books

Time: 8 minutes

Teaching Skill: Demonstration/Guided Practice

Teacher’s Activity: The teacher demonstrates how to prepare journal entries for typical hire purchase transactions (acquisition, down payment, depreciation, interest, installment payment) using the example provided in the Board Summary.

Pupils’ Activity: Students follow the demonstration, ask clarifying questions, and attempt to record the journal entries in their notebooks.

Learning Point: Hirer’s journal entries

Step 5: Ledger Accounts in the Hirer’s Books

Time: 7 minutes

Teaching Skill: Demonstration/Application

Teacher’s Activity: The teacher guides students to post the journal entries from Step 4 into the relevant ledger accounts (e.g., Machinery Account, HP Vendor Account, Interest Suspense Account) in the hirer’s books.

Pupils’ Activity: Students participate in posting the entries to ledger accounts, ensuring accuracy and balance.

Learning Point: Hirer’s ledger accounts

Step 6: Overview of Accounting in the Vendor’s Books

Time: 5 minutes

Teaching Skill: Explanation/Comparison

Teacher’s Activity: The teacher provides an overview of how hire purchase transactions are recorded in the vendor’s books, highlighting the main accounts and key journal entries, contrasting them with the hirer’s perspective.

Pupils’ Activity: Students listen and note the key differences and accounts used in the vendor’s books.

Learning Point: Vendor’s accounting overview

Step 7: Evaluation/Review

Time: 5 minutes

Teaching Skill: Questioning/Assessment

Teacher’s Activity: The teacher evaluates the learning by asking the following questions:

1. Define hire purchase.
2. State any two accounts used in the hirer’s books for hire purchase.
3. Outline the journal entry for the acquisition of an asset on hire purchase in the hirer’s books.
4. Briefly explain how interest is treated in the hirer’s books.

Pupils’ Activity: Pupils answer orally and in writing.

Learning Point: Hire purchase accounting

Step 8: Note-Taking

Time: 4 minutes

Teaching Skill: Guided Writing

Teacher’s Activity: The teacher guides pupils/students to copy the essential Board Summary notes, particularly the journal entries and accounts for the hirer’s books, into their notebooks.

Pupils’ Activity: Pupils/students copy the notes carefully into their notebooks.

Learning Point: Board summary copying

Step 9: Conclusion

Time: 6 minutes

Teaching Skill: Summarization

Teacher’s Activity: The teacher briefly summarizes the key aspects of hire purchase accounting, reiterating the importance of distinguishing between the hirer’s and vendor’s perspectives. The teacher encourages students to review the concepts learned.

Pupils’ Activity: Students listen to the summary and ask any final questions for clarification.

Learning Point: Key concepts reinforced

Continuous Assessment/Further Study

Type: Homework

Instruction: Answer the following questions in your Financial Accounting notebook:

1. Explain the term “Hire Purchase” and differentiate it from a regular credit sale.
2. A company acquired a machine on hire purchase for a cash price of N800,000. A down payment of N200,000 was made, and the remaining balance, including interest of N100,000, is to be paid in 4 equal annual installments. Depreciation is charged at 10% per annum on the straight-line basis. Show the journal entries for the acquisition, down payment, first year’s interest charge, and first installment payment in the hirer’s books.

Lesson Keywords

• Hire Purchase – A system where a buyer takes possession of goods but does not gain ownership until all installments are paid.
• Hirer – The buyer of goods under a hire purchase agreement.
• Vendor – The seller of goods under a hire purchase agreement.
• Down Payment – An initial payment made by the hirer at the time of signing the agreement.
• Installment – Periodic payments made by the hirer to the vendor.
• Interest Suspense Account – An account used by the hirer to defer and spread interest expense over the hire purchase period.
• Interest Receivable Suspense Account – An account used by the vendor to defer and spread interest income over the hire purchase period.

Differentiation

For weaker learners, provide simplified examples and pre-prepared ledger account formats. Focus primarily on the hirer’s books and basic journal entries. For faster learners, challenge them with more complex scenarios, such as calculating interest using different methods or preparing a full set of ledger accounts for both the hirer and vendor, including profit and loss implications.

Suggested Lesson Videos

Search YouTube for: “Hire Purchase Accounts in Hirer’s Books SS3 Financial Accounting”

Teacher Guide for Using This Lesson Plan

Before the lesson, ensure you have clear visual aids, such as charts detailing journal entries and T-accounts for both the hirer and vendor. Begin by reviewing basic accounting concepts to ensure students have the necessary foundation. When explaining the hirer’s books, emphasize the dual treatment of the asset (as owned for accounting purposes) and the liability. Walk through the journal entries and ledger postings step-by-step, using the provided example or a similar one. Encourage students to participate actively in preparing the accounts. For the vendor’s books, provide a concise overview, highlighting the key differences in accounting treatment. During the note-taking stage, ensure students copy the essential journal entries and account structures accurately. Provide individual support to students struggling with the debits and credits, and challenge advanced learners with additional scenarios or questions on the impact of hire purchase on financial statements.