{m}.{s}.1Summary: Financing an asset acquisition

Where a new asset is required in a business that is short of funds, the business may:

  • Lease the asset.
  • Increase/obtain a bank overdraft.
  • Obtain a bank or other loan.
  • Take out a hire purchase contract.

Leases can be either:

Operating leases
Where the lessee is effectively renting the asset
Finance leases
Where the lessee effectively pays for the asset over the period of the lease.

{m}.{s}.2Summary: Acquisition under hire purchase

HIRE PURCHASE

Payment of deposit

  Dr Cr
Asset- cost x  
VAT x  
Bank   x
[{m}.{s}a]

Balance of cost on credit: (not to include interest charges)

  Dr Cr
Asset- cost x  
HP creditor   x
[{m}.{s}b]

Subsequent repayments

  Dr Cr
HP interest x  
HP creditor x  
Bank   x
[{m}.{s}c]