Get AHSEC Class 12 Finance Chapter: AHSEC Class 12 Finance Chapter: 15 HIRE PURCHASE SYSTEM Important Questions Answers 2025.
In this Post we have provided HS 2nd Year Finance Chapter: AHSEC Class 12 Finance Chapter: 15 HIRE PURCHASE SYSTEM Important Notes with Marked/highlighted previous year questions asked in AHSEC Examination.
AHSEC Class 12 Finance Notes
AHSEC Class 12 Finance Chapter: 15 HIRE PURCHASE SYSTEM
HIRE PURCHASE SYSTEM
1. What do you mean by Hire Purchase System? Who are the parties involved? What are its characteristics/special features/salient features?
Ans: Meaning of Hire Purchase System: Hire Purchase System is a system where the buyer acquires the immediate possession of the goods but agrees to pay the price of goods by a number of periodical installments (yearly, half-yearly, quarterly or monthly). Generally a sum of money may be paid at the time of taking delivery of goods, which is known as down payment or initial payment. Ownership is only transferred when the last installment is paid. Parties involved in H.P system
[Means the seller]
(a) Hire Vendor/Vendor
(b) Hire Buyer/Buyer. [Means the purchaser, the person who purchases Assets] Features or characteristics of Hire Purchase System:
Features of hire purchase system are discussed below:
1.Possession of goods: The hire purchase agreement gives the buyer the right to get immediate possession of goods.
2. Agreement: Hire purchase system is an agreement to sale but not a contract of sale. Sales takes place at the future date as per the agreement entered into between the buyer and the seller.
3. Ownership: Ownership of goods remains with the seller till the date of payment the last instalment.
4. Down payment: Immediately on delivery of goods, generally some payment is made by the buyer to the seller, which is called cash down or down payment’ or ‘initial payment, it does not include any interest.
5. Mode of Payment: The price of goods is to be paid by a number of instalments and each instalment includes some amount instalment and of interest.
6. Each instalment is treated as Hire charge: All instalments paid upto the last instalment are considered as hire charge in case of repossession because of default in payment.
7. Right to forfeit: The seller has right to forfeit the already received amount, in case of default in payment.
8. Re-possession of goods: In case of default in payment of any instalment by the buyer, the seller has the right to repossess the goods from the buyer.
9. Return of goods: The buyer can return the goods at any time before payment of last instalment after giving 14 days notice in writing.
10. Types of goods: Generally goods sold/purchased under HP system of of higher value, durable and re- saleable in nature.
2. What are the advantages and disadvantages of the Hire purchase system? (For both Buyer and Seller) [AHSEC 2024]
Ans: Under the hire purchase system both the parties enjoy some advantages.
They are: From the point of view of the hire vendor:
a. Increase in volume of sales: This system of sales provides an opportunity to seller to increase their volume of turnover and consequently to earn more profit.
b. Security of payment: Under this system the seller is entitled to take away the goods from the buyer at any point of time, if he makes default in the payment of any instalment. Thus this had provided a sense of das security to the seller against the bad debts.
c. Interest: The seller is entitled to receive interest on unpaid amount at an agreed rate and so the seller gets compensation for fund blocked for long time.
d. Social service: Through the hire purchase system the seller can fulfil its social obligation to the society, by enabling the people whose income is low to acquire costly good and thereby raise the standard of living of the people.
From the point of view of the hire Purchaser
a. Immediate possession: As the hire buyer get the immediate possession of the good he can enjoy the goods before the full payment is made.
b. Option to return the goods: The hirer has an opportunity to use the goods and test the quality through actual use and if the goods are found to be defected in quality or fails to satisfy his needs, he has the option of returning the goods.
c. Payment of instalment through earning: The buyer can use the goods productively and the fund generated therein can be utilized in the payment of instalment and consequently he can obtain the ownership of the goods.
d. Credit facility: Under this system the hire vendor offers the credit facility to the hire buyer and so they don’t required to undertake troubles of securing outside finance.
e. Ownership through Instalments: Buyers can own expensive items without a large upfront payment. They can pay in smaller, regular amounts over time.
f. Encourages Saving Habit: This payment approach encourages buyers to save a portion of their income to cover the instalments, promoting a habit of thriftiness.
e. Self-Financing Opportunity: Things bought this way can be used to make money, which can then be used to pay the vendor.
h. Quality Assurance: Goods purchased through hire purchase usually come with guaranteed quality. Unsatisfied buyers have right to return the items if needed.
Disadvantages of Hire Purchase System:
For buyer:
i. High price: The levy of interest by the hire vendor increases the total cost of the goods sold under hire purchase system, thereby making the goods costlier.
il. No right of ownership: As the buyer does not enjoy the right of ownership, he can neither sell nor mortgage the asset until the payment of the last instalment. ili. Risk of financial strain on the buyer: It associates financial strain on the income of the buyer since he is to pay the periodical instalments in time out of his income to avoid the risk of repossession by the seller.
For Seller:
i. Risk of bad debt: Since the goods sold under hire purchase system are expensive, the hire vendor runs the risk of bad debt if the hire purchaser makes default in payment of Instalments where the market value of the goods sold has decreased in the meantime.
ii. Requirement of huge capital: Hire purchase form of trade requires huge capital investment which is not affordable by all traders. Challenges In Choosing Buyers: Sellers find it hard to pick the right buyers. People may seem ווי trustworthy at first, but they can change over time.
3. Write the meaning of the terms: Ans:- Hire-purchaser or Hirer, Hire Vendor, Cash Price, Hire Purchase Price, Down payment, Hire or Hire Charge, Hire purchase agreement, Instalment Ans: Hire – purchaser or Hirer: Hire – purchaser is one who agrees to buy the goods under Hire – purchase system.
Hire Vendor: Hire vendor is one who sales goods under Hire – Purchase System.
Cash Price (Less Imp): It is an amount for which goods can be purchased by the hire purchaser by making cash payment immediately without having any instalment facilities. This amount does not include any interest. It means the price of Assets without interest.
Hire Purchase Price: It is a total amount payable by the hire purchaser to the hire vendor as per hire purchase agreement. This amount includes down payment made plus all instalments payable including interest. Thus Hire Purchase Price Total payment made by buyer i.e. Cash Price + Interest or D.P+ (instatment + interest) Down payment: This is an amount paid by the hire purchaser to the hire vendor immediately after taking delivery of goods. This is also known as initial payment made by the hire purchaser. Simply it is the amount which is paid at the time of signing the agreement.
Hire or Hire Charge: It is the sum payable periodically by the hire purchaser to the hire vendor under hire purchase agreement. l.e. Amount of instalment including interest or Installment + interest is called Hire Charge
Hire purchase agreement: Hire purchase agreement means an agreement under which goods are bought or sold under HP System. This agreement includes cash price, agreed amount of periodical instalment, possession of goods, right of termination of agreement etc. Instalment (Less Imp): Instalment is the periodical payments made by the hire purchaser to the hire vendor towards the payment of hire purchase price. It is also known as hire charge. It includes both a part of principol (capital value) and interest. 4. Mention five rights of a hire buyer and a vendor under the Hire Purchase Act, 1972. [EXTRA JUST FOR KNOWLEDGE, READ ONLY]
Ans: Rights of a Hire Buyer/Vendor:
a. Right to get possession of the goods: – A hire buyer has the right to get possession of the goods as soon as he enters into an agreement of hire purchase.
b. Right to return the goods: – A hire buyer has the right to return the goods before he pays the last instalment.
c. Right to get the notice of termination: – A hire buyer has the right to get the notice from the hire vendor a written notice of termination of the hire purchase agreement when he does not pay an instalment. d. Right to receive statement of account: A hire buyer has the right to receive from the vendor, a statement showing the amount paid by or to be paid together with interest and dates of payment etc.
e. Courts sanction: – In certain cases, the hire buyer can seek from the vendor the court’s sanction.
Rights of a hire vendor: a. Right to get payment: A hire vendor has the right to get the full agreed amount from the hire buyer by instalment on due dates.
b. Right to charge interest: A hire vendor has the right to charge interest on the outstanding amount.
c. Right to repossess: A hire vendor has the right to repossess the goods if the buyer pay any instalment. d. Right to treat the instalment as rent: A hire vendor has the right to treat the instalments paid by the buyer as rent for the use of the goods if the buyer fails to pay an instalment.
e. Buyer as a ballee of the goods: A hire vendor has the right to treat the hire buyer as the bailee of the goods.
f. Fulfillment of the condition of the agreement: A hire vendor has the right to insist that the buyer should fulfill the conditions of the hire purchase agreement.
5. What type of goods are sold under hire-purchase system?
Ans: Generally goods sold or purchased under HP System of of higher value, durable and re-saleable in nature.
6. What are the terms of Hire-purchase System?
Ans: Hire-purchase is a way of buying and selling goods with specific terms:
(a) Instalment Payments: The cost is paid in smaller parts over time.
(b) Immediate Possession: The buyer gets the goods right away.
(c) Ownership Retained: The seller keeps ownership until the last payment.
(d) Repossession Option: If payments are missed, the seller can take back the goods.
(e) Instalments as Hire Charges: Each payment is considered a hire charge until the final one is made.
7. Distinguish between Lease and Hire Purchase. [AHSEC 2024]
Ans;
| Aspect | Lease | Hire-Purchase |
| Ownership | The lessor retains ownership of the asset. | The hirer (buyer) gains ownership after completing all payments. |
| Duration | Typically shorter-term, often renewable. | Typically longer-term, leading to ownership. |
| Payment Structure | Regular rental payments for asset usage. | Regular installment payments with an option to purchase. |
| Maintenance | Maintenance responsibility may vary. | The hirer is often responsible for maintenance. |
| Tax Benefits | Limited tax benefits for the lessee. | Potential tax benefits for the hirer. |
| End-of-Term Options | Options may include renewal or purchase. | Option to purchase the asset at the end. |
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