Items bought through hire-purchase type of financing include cars, vans, buses, industrial equipment, agricultural equipment, construction materials, construction machinery and large vehicles. Hire purchase is a European accounting term comparable to "rent-to-own" or "lease purchase" in the United States. This type of financing reduces short-term costs and allows companies to make more equipment purchases at once.Continue Reading
The buyer of goods does not fully own the property until the contract is paid in full, including interest and fees. Leasing equipment looks more attractive on balance sheets because it appears there is less debt owed by a company.
Accounting issues with regards to hire purchases include determining whether or not these leases are assets, loans, debts or expenses. Some legal forms of hire purchases are counted as the hiring of an asset. Utilizing a hire purchase is one method to finance an asset purchase when a capital allowance is advised by law.
Advantages to hire purchases include fixed-rate payments for easier expenditure budgeting, lack of quick depreciation, better tax incentives, lower maintenance costs and less drain on capital with added assets. Disadvantages to this type of financing include extra fees for breaking the contract due to strategic changes, administrative complexity and capital payments higher than the actual cost of the asset.Learn more about Household Budgets