You know that when the purchaser fails to pay any of the instalments, the hire vendor can take back the possession of the goods. The amount already paid to the vendor as a part of the payment for the asset is treated as the hire charge. So far as the repossession of goods is concerned, the vendor can either take back the whole of the asset or a part of it. Let us now discuss what entries will be passed in case of (i) complete repossession and (ii) the partial repossession.
Complete Repossession
When the hire purchaser does not pay the instalment, the vendor can take back the possession of goods. In case the vendor takes the possession of all the goods, it is called complete repossession. It means the vendor will close Hire Purchaser’s Account in his books and vice versa. The journal entries passed are as follows:
i) All the entries (except the entry for payment) are passed as usual up to the date of default.
ii) For closing the account of the purchaser
Goods Repossessed A/c Dr.
To Hire Purchaser
(Transfer of balance)
iii) For repairs and other expenses on the repossessed goods
Goods Repossessed A/c Dr.
To Cash A/c
(Repairs and other expenses)
iv) For resale of goods repossessed
Cash A/c Dr.
To Goods Repossessed A/c
v) Any balance left in Goods Repossessed Account is either profit or loss, which is ultimately transferred to’ Profit & Loss A/c. In case of profit the entry will be :
Goods Repossessed A/c Dr.
To Profit & Loss A/c
In case of loss, the above entry will be reversed.
In the books of Hire Purchaser
i) All the entries (except the entry for payment) are passed as usual up to the date of default, including the entry for depreciation.
ii) For closing the account of the vendor
Hire Vendor A/c Dr.
To Asset A/c
iii) For closing the Asset Account
Profit & Loss A/c Dr.
To Asset A/c
Generally there is a loss to the hire purchaser, so the above entry is passed for loss on seizure of goods. In case of profit, the above entry will be reversed.
Partial Repossession
Sometimes, in case of default, the vendor enters into a compromise with the hirer and does not repossess the complete goods. But, he repossesses a part of the goods called partial repossession. In this case, some part of the asset is still left with the buyer.
So far as the accounting treatment of partial possession is concerned, interest and depreciation entries are passed as usual in the books of both the parties upto te date of default, but not the entry for payment.
As some part of the asset is left with the hire purchaser, the hire vendor does not close the Hire Purchaser’s Account in his books, nor does the hire purchaser close the Hire Vendor’s Account in his books. They ascertain the current value of the asset repossessed with the help of an agreed rate of depreciation (it is usually an enhanced rate). The hire vendor debits the same to the Goods Repossessed Account and credits it to the Hire Purchaser’s Account. Similarly, the hire purchaser debits the Hire Vendor’s Account and credits the Asset Account with the agreed value of the asset repossessed. As for the part of asset left with him, the hire purchaser applies the normal rate of depreciation and shows the depreciated value as a balance in the Asset Account. The balancing figure in the asset account will show the profit or loss on default and it will be transferred to the Profit & Loss Account.
