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How is the accounting for hire purchase transactions done?
Accounting for hire purchase transactions are done on the following basis:
1) The hire charges paid by the hirer are divided as the payment against capital repayment and the payment against the interest. The interest payment is only debited to profit and loss account, whereas the payment against the capital repayment reduces liability for the hirer.
2) Asset taken by the hirer on hire is capitalized in the books of the hirer, though the ownership does not transfer to the hirer till the last installment of hire charges is paid by him. Only payment against interest is tax deductible expenditure for the hirer. Hirer claims the depreciation on the asset taken by him on hire purchase and the same is treated as tax deductible expenditure for the hirer.
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