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Hire purchase steps please

Please help with some simple steps how to do this, as I am very confused by the various options in previous posts!

A new van has been purchased @ £20k list price. £7k deposit paid from bank, balance is due via hire purchase.

The accountant has suggested I set the full HP amount (£23k, so includes £3k interest) up as a loan. Therefore being able to tag the full value of the purchase to clear the invoice (tagged as motor vehicle).

I have done this, but now need to identify the HP interest (£3k over 35 months). Help! What do I do next?

Ask your accountant would be the best option. I don’t want to step on his/her toes.

The accountant has advised to set up the HP as a loan (done), but I don’t know how to classify the interest in QF. He uses QB, so couldn’t help.

You’d need to create a new nominal called H.P Interest, and you’d need to seperate the capital and interest from the repayments using journals.

If your unsure how to do this, again I’d ask your accountant, because I don’t know how he’s treated the loan side (whether it’s just the amount outstanding excl interest or the full repayable amount) but in essence you would split the repayment and tag the capital to the loan account and the interest to the new nominal.

3k over 35 months is £85.71 per month.

Thank you Paul, but I’m getting myself in a real pickle!

Other posts also advise setting up the HP as a loan to pick up the VAT capability in QF. Can anyone tell me what I’m missing or have done wrong in the initial set up?

Invoice = £23k
Deposit tagged from bank to invoice = £7k
Invoice has £17k outstanding

Set up Loan Account
£0 opening balance
Transfer in £20k from the HP Nominal I have created.
Tag a “Paid in full” to the invoice to clear £17k
But the balance due on the account is £-17k. How do I represent the £3k interest?

I’ve missed a step. Please help!

Paul’s suggestion was to create a custom nominal to represent the interest only. I think what you should maybe have done is:

  • purchase invoice for £20k (not 23k)
  • 7k deposit is a part payment against that purchase
  • create a loan account to represent the HP element
  • pay off the rest of the purchase from the loan account, leaving the purchase fully paid up and the loan account £13k overdrawn

Now create a nominal in the overheads section to represent the cost of the interest. Your accountant’s initial suggestion of “set the full HP amount (£23k, so includes £3k interest) up as a loan” suggests you should just manually create a £3k “money out” transaction in the loan account and tag it via “something not on the list” to the HP interest nominal.

At this point the purchase is paid up and the loan account is overdrawn by £16k, and subsequent repayments are just bank transfers from your current account to the loan account until its balance reaches zero at the end of the 35 months.

However doing the interest as one £3k lump would mean the whole £3k gets assigned as a cost to this year’s P&L rather than spreading it across the three or four financial years covered by the 35 month term - I’d check again with the accountant whether this is correct, it may be necessary to split this £3k into monthly or yearly chunks to apportion it better.

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