Asset bought on hire purchase

Sometimes you don't buy an asset outright, but buy it over time on a lease purchase or hire purchase agreement. This is how to account for that in FreeAgent.

Sometimes you don't buy an asset outright, but buy it over time on a lease purchase or hire purchase agreement. Here's how to account for that in FreeAgent.

Please note, this only applies to assets you're buying, not to those you're hiring. Sometimes it's difficult to distinguish between the two if the legal arrangement is complex. Check with your accountant if you're not sure.

1 New bank account for the hire purchase agreement

Set up a new bank account, and call it something like "Computer Hire Purchase".

If you're buying several different assets on hire purchase, set up a new bank account for each one.

2 Enter the asset as a bill

Enter the asset as a bill to one of the capital asset categories, then mark that bill as paid from the new bank account you set up at step 1.

I've bought a computer on hire purchase that cost me £1,000 + VAT, so I would enter the computer as a bill, using the category Computer Equipment Purchase (preferably with a copy of the hire purchase agreement attached). I would then set up a bill payment from the hire purchase bank account for that computer, and make the payment in full with a manual bank entry dated the same day as the bill.

The bill will look something like this.

hp_bill

And the bill payment screen will look like this.

hp_bill_payment

Remember not to use the Pay Bill button when you're entering the bill payment, as you won't be paying it from the primary bank account.

3 Paying off the hire purchase loan

Each month I'm paying £45.20 to the hire purchase company.

I'll explain this in my main bank account in FreeAgent as a Transfer to Another Account, the other account being the hire purchase account, like this.

hp_bank_transfer

4 Interest on the hire purchase agreement

Of each of my monthly payments to the hire purchase company, £12.57 is interest.

So I'd enter a monthly payment from the hire purchase bank account, with type Payment and category Interest Payable, like this.

hp_interest_paid

Using this method means the capital asset is included in full in my accounts, so is the amount I owe to the hire purchase company (which is the balance on the hire purchase bank account), and I'm correctly accounting for the interest on the hire purchase.

A word of caution about VAT

This method will calculate the VAT correctly if you are invoice accounting for VAT.

HMRC also say that if you're buying an asset on hire purchase, even if you're normally cash accounting for VAT, you should account for VAT on the invoice basis when you "buy or sell goods using lease purchase, hire purchase, conditional sale or credit sale".

So, how you'd account for the VAT if you're cash accounting, will depend on the VAT invoice that your supplier gives you.

They may give you just one VAT invoice for the asset itself, in which case, you're fine.

But they may give you a schedule of VAT invoices, with, in effect, a VAT invoice for each month's payment.

If this is true in your case, once you've posted the original purchase of your asset, post two journal entries dated the same day as your asset purchase, to move the full amount of the VAT to the Deferred VAT account. In the above example, that would be £200 of VAT.

Credit code 818 VAT Reclaimed, and debit code 823 Deferred VAT.

Then, each month, once you've posted your payment, journal the VAT on that payment only (and your schedule from your hire purchase company will show you how much that is), debiting code 818 and crediting code 823.

If you get stuck with VAT postings, please ask your accountant, or contact us for support on support@freeagent.com

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