Hire Purchase Agreements and Leases

Hire Purchase Agreements and Leases

This knowledge base article seeks to unravel the mysteries of Hire Purchase agreements and Leases and how to account for them in Sage 50 accounts.

To account for the financing of an asset you need to take into account whether the asset is owned from the outset or is it a rental, if unsure of its nature talk to your accountant before setting up and accounting for it in Sage.

Rental

This is usually straight forward enough as the asset is never owned and there will be an annual schedule for Vat on the monthly repayments. A nominal code for Leases needs to be setup in the 7000’s or 8000’s as it is an expense and the monthly payment is entered with the Vat as a Sage Bank Payment.

Hire Purchases Agreement/Lease Purchase

We recommend the following procedure

  • A Supplier account needs to be setup for the Finance provider.
  • Set up a Nominal code for the Hire Purchase Loan in the  2000 number range. Be sure to add to your Chart of Accounts
  • Create a nominal code to represent your vehicle/machinery as a fixed asset of the business, use a code in the range 00xx
  • Enter a Supplier Invoice to above Fixed Asset nominal including the VAT
  • Enter the deposit you paid  as a supplier payment allocated to the Supplier Invoice
  • Enter a Supplier Credit Note (for the difference ie the money you now owe) with the nominal code for the HP Liability Account and Vat Code T9
  • The repayments will go to the HP Liability account as a bank payment and Vat Code T9.  Part of the first repayment, the document fee, can go to a Bank Charge nominal account.
    This part does not have to be done but it shows the total and true liability of the Hire Purchase Agreement.
  • Setup a HP Deferred Interest nominal Account in the 2000’s
  • The total HP Loan Interest and charges is debited to the HP Deferred Interest account and credited to the Hire Purchases Loan Account.
    This part can be done on a monthly or annual basis, often the accountant will do this part but if you want to account for the interest on HP agreement this needs to be done

    • Debit a nominal code in the 7000’s or 8000’s that needs to be set up firstly with the interest.
    • Credit the HP Deferred Interest account