## Hire-Purchase — Concept and Audit

### What is a Hire-Purchase Agreement?

A hire-purchase agreement is one under which:

Goods are let on hire to the hirer.
The hirer has the option to purchase them in accordance with the terms.

Specifically, it includes agreements where:

1. Possession of goods is delivered to a person on condition that they pay an agreed amount in periodic instalments.

2. Property (ownership) passes to that person upon payment of the last instalment.

3. The hirer has a right to terminate the agreement at any time before property passes.

> Key distinction: The hirer possesses and uses the asset, but does not own it until the final instalment is paid.

### Auditor's Checklist for Hire-Purchase Transactions

The auditor should examine:

1. Form of Agreement

The hire-purchase agreement is in writing and signed by all parties.

2. Content of Agreement — Mandatory Disclosures

The agreement must clearly specify:

(a) The hire-purchase price of the goods.
(b) The cash price of the goods (i.e., price if purchased outright for cash).
(c) The date of commencement of the agreement.
(d) The number of instalments, the amount of each instalment, and the date each instalment is payable.
(e) A description of the goods sufficient to identify them.

3. Regularity of Payments

Ensure instalment payments are being received regularly as per the agreement.

Worked example

### Example 1

Example: A company has entered into a hire-purchase agreement for machinery. The agreement does not specify the cash price. Is this a valid agreement? What is the auditor's concern?

Answer: A valid hire-purchase agreement must specify the cash price. Without it, the agreement is incomplete. The auditor should flag this as a non-compliant agreement and check whether the pricing terms are being applied correctly. It may also affect accounting treatment and disclosure.

### Example 2

Example: A hire-purchase instalment of ₹50,000 was due on 31st March but was received on 20th April. What should the auditor do?

Answer: Verify the agreement terms for late payment penalties or interest. Check whether late charges were levied and received. If default persists, check whether the hire-purchase agreement allows the owner to repossess the goods, and verify whether appropriate disclosures are made in financial statements.

⚠️ Common exam mistakes

Confusing hire-purchase with a simple loan — in hire-purchase, ownership does NOT pass until the last instalment; goods can be repossessed if the hirer defaults.
Not checking whether the cash price (not just instalment price) is disclosed in the agreement — both are mandatory.
Treating all hire-purchase payments as revenue expenditure — only the interest component is expense; the principal component reduces the liability (from the hirer's perspective).
Missing the right-to-terminate clause — the hirer can terminate before ownership transfers, which affects accounting for the remaining liability.

Reference:

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Audit of Hire-Purchase Transactions

Worked example

⚠️ Common exam mistakes