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Using hire purchase may be an option open to you when you are thinking about buying a piece of equipment. Use this quick guide to discover the implications of a hire purchase arrangement and how this may affect your budget.
Is a Hire Purchase Item a Capital or a Revenue Cost?
When budgeting for hire purchase items, you need to consider capital and revenue costs in your budget. When you sign up to a hire purchase scheme, you get the use of a fixed asset, but you haven’t paid for it all upfront. At the end of the hire purchase scheme, you will own the asset, so you should record the cost (i.e. the net purchase price) in your balance sheet as a fixed asset. This is a capital cost. As a result of not paying the full amount of the asset up front, interest accrues on the amount that you still have to pay. The interest element is separate from the actual value of the asset. As a result, it should be recorded as an expense item in the profit and loss account. Therefore it is a revenue item.
An Example of Hire Purchase Costs
You are in charge of the budget for your team, and you want to know how much money you will need to set aside in your budget for some computers that you plan to pay for on hire purchase.
