Hire Purchase and Leasing

In a hire purchase contract the owner undertakes to hire the goods to the customer for a fixed term and to transfer the property to the latter when all installments of hire have been duly paid. The ownership in the goods continues to vest with the owner till agreed price is paid in full.

Similarly, leasing is a method of financing the acquisition of capital equipment where the user (lessee) of the equipment selects the equipment and is allowed to use the equipment during the period of the lease by paying a predetermined lease rental. The legal ownership continues to vest with the leasing company (lessor).

The main difference between the hire purchase and leasing relates to the ownership and accounting treatment. While in the case of lease the ownership of the equipment always remains with the leasing company (the lessor); the ownership in the case of hire purchase goes to the person making use of the equipment only at the end of the contract and when the last installment is paid by him. Thus hire purchase is a conditional sale.

Again, while lease assets would appear in the books of the lessor as assets, the amounts receivable on items sold on hire purchase are treated as stocks on hire (i.e. Current assets) in the books of the hire purchase company. And in the books of the purchaser, they are treated as fixed assets and are therefore eligible for depreciation.

Advantage of leasing:
Saving of capital: Leasing covers the full cost of equipment.

Payment terms of rentals: The lease rentals can be worked out as per cash flow requirements of the lessee.

More liquid: Leasing helps the lessee having liquidity problems as he can sell the equipment after revaluing it and obtain the same on lease.

Off balance sheet direct accounting: A lease contract is outside the assets and liabilities structure of the lessee company.

Tax efficient: Lease rentals are generally fully tax deductible as operating expenses.

Types of leasing:
The following are the