CA Inter - Accounting | Hire Purchase | Made Easy | CA Sathya Raghu

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Higher purchase and installment sale transactions are financial arrangements used for the acquisition of assets, such as cars, electronics, or machinery, where the buyer makes payments over a period of time rather than paying the full purchase price upfront. These transactions involve the transfer of ownership of the asset from the seller to the buyer upon certain conditions being met.

Higher purchase transactions involve the buyer paying a series of installments over a specified period, typically with interest, until the full purchase price is paid. The legal ownership of the asset usually transfers to the buyer upon the payment of the final installment. If the buyer fails to make payments, the seller may repossess the asset.

On the other hand, installment sale transactions allow the buyer to take possession of the asset upon making an initial down payment, with the remaining balance paid in installments over time. Unlike higher purchase transactions, the legal ownership of the asset transfers to the buyer at the beginning of the transaction, although the seller may retain a security interest until full payment is made.

In both types of transactions, interest may be charged on the outstanding balance, representing the cost of financing the purchase. This interest is typically calculated based on the remaining principal amount and the agreed-upon interest rate.

From an accounting perspective, there are important considerations regarding the treatment of higher purchase and installment sale transactions. Accounting standards often emphasize substance over legal form, meaning that the economic reality of the transaction should be reflected in the financial statements, regardless of the legal framework.

In higher purchase transactions, although legal ownership may transfer only upon the payment of the final installment, the buyer typically assumes the risks and rewards associated with ownership from the outset of the transaction. Therefore, for accounting purposes, the asset is recognized on the buyer's books at the beginning of the transaction, and the total purchase price, including interest, is recorded as a liability.

Similarly, in installment sale transactions, where the legal ownership of the asset transfers to the buyer at the beginning of the transaction, the buyer recognizes the asset and corresponding liability on their books immediately. Any interest payable over the term of the installment payments is recorded as an expense.

The seller, on the other hand, recognizes revenue from the sale of the asset at the beginning of the transaction, regardless of whether it is a higher purchase or installment sale. Any interest income earned by the seller over the term of the transaction is recorded as revenue.

In summary, higher purchase and installment sale transactions offer buyers the flexibility to acquire assets over time while spreading the cost of the purchase. From an accounting perspective, it is essential to consider the economic substance of the transaction and reflect it accurately in the financial statements, ensuring transparency and compliance with accounting standards.

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