Default and Repossession in Hire Purchase

In this post, we will discuss default and repossession, which are two crucial elements of the hire purchase accounting system. Let’s understand them in detail.

‘Default’ is the failure to act, appear or pay, i.e., failure to meet the obligation. Under a hire purchase agreement, the hirer has an obligation to pay up to the last instalment so that the ownership of goods smoothly passes to him.

If he fails to meet this obligation, it will be treated as a default on his part.

Possession of goods means the physical holding of goods. You know that under the hire purchase agreement, the vendor transfers the possession of goods. He does not transfer the ownership, and if the hirer fails to pay even the last instalment, he has the legal right to recover the possession of the goods.

This act of recovery of possession is termed as ‘repossession’.

Rights of the Hire Vendor

Rights of hire vendor to terminate the hire purchase agreement

Where the hirer makes more than one default in payment of instalment as provided in the agreement, the hire vendor (the owner) shall be entitled to terminate the agreement by giving the notice of termination in writing.

Rights of the hire vendor on termination:

Where a hire purchase agreement is terminated, the hire vendor (the owner) shall be entitled

(i) to enter the premises of the hirer and seize the goods,

(ii) to retain the hire charges already paid and to recover the arrears of hire charges due, and

(iii) to claim damages for non-delivery of the goods.

Restrictions on the Owner

The above rights of the owner are, however, subject to the following restrictions :

Rights of the hirer in case of seizure of goods by the owner:

Where the owner seizes the goods lent under a hire purchase agreement, the hirer may recover from the owner the amount, if any, by which the hire purchase price falls short of the aggregate of two amounts

(a) the amounts paid in respect of the hire purchase price up to the date of seizure) and

(b) the value of the goods on the date of seizure.

Restrictions on owner’s right to repossess:

Where goods have been let under a hire purchase agreement, and the statutory amount of the hire purchase price has been paid, the owner shall not enforce any right to recover possession of the goods from the hirer otherwise than by ‘verdict of any competent court .

Accounting Treatment of Default and Repossession

As per the hire purchase agreement, when the purchaser or hirer fails to pay his required instalments, and by that agreement, the seller or owner gets the right to repossess the goods or assets for such default. Under such circumstances, the seller may repossess the goods or assets entirely or partially. Their accounting treatments under different situations are shown below.

Complete Repossession

In the books of the buyer

1. All the necessary entries are to be shown up to the date of default as usual.

2. Then Vendor’s A/c is to be closed by debiting his A/c and crediting the Asset A/c.

3. After that, if there is any balance in the Asset A/c, the Asset A/c is to be closed by transferring the balance to Profit and Loss A/c.

In the books of the seller

1. All necessary entries are to be shown up to the date of default as usual.

2. Then Purchaser’s A/c is to be closed by debiting Goods Repossessed A/c and crediting Purchaser’s A/c.

3. After that, if any expenditure is incurred to repair the said asset/goods, the Goods Repossessed A/c is to be debited.

4. Subsequently, when the repossessed goods are sold, Cash/Bank A/c will be debited, and Goods Repossessed A/c will be credited. If there is any balance in the Goods Returned A/c, it is to be transferred to Profit and Loss A/c.

Partial Repossession

In the books of buyer

1. All the necessary entries are to be shown up to the date of default as usual.

2. Then entry to be shown for the agreed value of the assets taken over by the seller by debiting Vendor’s A/c and crediting Assets A/c.

3. The remaining asset left by the seller will continue as before and will show the closing balance (c/d) of the Asset A/c. If there is any balance in the Asset A/c, it will represent profit/loss on repossession and is to be transferred to Profit and Loss A/c.

In the books of the seller

1. All the necessary entries are to be shown up to the date of default as usual. Then Purchaser’s A/c is to be credited, and Goods Returned A/c is to be debited for the assets taken over (as per the agreed value).

2. The Purchaser’s A/c will continue as per the new agreement.

3. After that, if any expenditure is incurred for repair of the said asset/goods, the Goods Repossessed A/c is to be debited.

4. Subsequently, when the repossessed goods are sold, Cash/Bank A/c will be debited, and Goods Repossessed/Returned A/c will be credited. If there is any balance in the Goods Repossessed/Returned A/c, it is to be transferred to Profit and Loss A/c.