Nowadays, if you want to use an asset, you don’t need to purchase it from the seller. There are many offers whereby, you can use the asset just by paying the price for using it. Two of those schemes are going to be discussed here in this article; they are Hire Purchasing and Leasing. The former is a business deal in which the purchaser of the asset, pays a small amount at the beginning and the rest of the price in instalments. The lease is an agreement between two parties in which the lessor lets the lessee, use his asset for the payment of monthly rentals.
One thing you should notice is that hire purchase is a kind of lease. Given below are the major differences between hire-purchasing and leasing.
Content: Hire Purchasing Vs Leasing
|Basis for Comparison||Hire Purchasing||Leasing|
|Meaning||The deal in which one party can use the asset of the other party for the payment of equal monthly installments is known as Hire Purchasing.||Leasing is an agreement where one party buys the asset and allows the other party to use it by paying consideration over a specified period is known as Leasing.|
|Governing Accounting Standard||No Specific Accounting Standard||AS- 19|
|Down Payment||Required||Not Required|
|Installments||Principal plus interest||Cost of using the asset|
|Asset type||Car, trucks, lorries etc.||Land and Building, Property.|
|Ownership||Ownership of the asset is transferred to the hire purchaser on the payment of the last installment.||Transfer of ownership depends on the type of lease.|
|Repairs & Maintenance||Responsibility of hire purchaser.||Depends upon the type of lease|
|Consideration||Initial payment plus installment.||Lease Rentals|
|Duration||Short Term||Comparatively Long term|
Definition of Hire Purchasing
Hire Purchasing is an agreement, in which the hire vendor transfers an asset to the hire purchaser, for consideration. The consideration is in the form of Hire Purchase Price (HPP) which includes cash down payment and instalments. The hire purchase price is normally higher than the cash price of the article because interest charges are included in that price. The instalment paid by the hirer at periodical intervals up to a specified period. The instalment is a sum of finance charges i.e. interest and the capital payment i.e. principal.
Under Hire Purchase transaction only the possession of the assets is transferred to the hirer. However, there is a condition of the transfer of ownership, i.e., hire-purchaser ought to pay all the instalments due on the asset transferred. By virtue of this, if the hire purchaser is unable to pay the outstanding instalments, then the hire vendor can repossess the asset without paying any compensation to the hirer.
The recording of accounting transactions in the books of hire vendor and hire purchaser is different. The method of accounting used by the parties is as under:
- In the books of hire vendor:
- Interest Suspense Method
- Sales Method
- In the books of hire-purchaser:
- Interest Suspense Method
- Cash Price Method
Definition of Leasing
A contract in which one party (lessor) permits to use the asset for a specified period to another party (lessee) in exchange for periodic payments for a specified time is known as Leasing. Accounting standard – 19 deals with leases which apply to all the enterprises, subject to certain exemption.
At regular intervals, the lessee pays a sum to the lessor which is known as Lease Rents, as a consideration for using the asset owned by the lessor. In addition to this, the lessor also gets a terminal payment known as Guaranteed Residual Value (GRV). The aggregate of the lease rent and guaranteed residual value is known as Minimum Lease Payments (MLP). If the Lessor receives, the amount more than the guaranteed residual value is known as Unguaranteed Residual Value. There are two ways of leasing the asset, which is as under:
- Operating Lease: The lease which covers only a small part of the useful life of the asset is Operating Lease. In this kind of lease, there is no transfer of risk and rewards.
- Finance Lease: A lease agreement to finance the use of the asset for the maximum part of its economic life is known as Finance Lease. All the risk and rewards incidental to the ownership is transferred to the lessee with the transfer of the asset.
Key Differences Between Hire Purchasing and Leasing
The difference between hire purchasing and lease financing are discussed in the points given below:
- An arrangement to finance the use of the asset, in which one party pays consideration to the other party in periodical instalments is known as Hire Purchasing. Leasing is a business deal in which one party buys the asset and grants the other party to use it, in return for lease rentals.
- Leasing is governed by AS – 19 whereas there is no specific Accounting Standard for Hire Purchasing.
- Down Payment is a must, in hire-purchasing but not in leasing.
- The duration of leasing is longer than the hire purchasing.
- Leasing may cover asset like land and building, plant, and machinery, etc. Conversely, cars, trucks, tempos, vans, etc. are the kind of assets which are sold on hire purchasing.
- The instalment paid in hire purchasing includes the principal amount and interest. In contrast to Leasing, in which the lessee has to pay the cost of using the asset only.
- In hire-purchasing, the ownership is transferred to the hirer only if he pays all the outstanding instalments. On the other hand, in a finance lease, the lessee gets the option to buy the asset at the end of the term by paying a nominal amount, but in operating lease, there is no such option available to the lessee.
In hire purchasing, the hirer has to pay an advance along with periodical instalment as consideration, but in the case of leasing the lessee has to pay lease rentals at specified intervals. With this article excerpt, hopefully, you’ve got the necessary differences between hire-purchasing and leasing.