When working with hire purchase accounts, you’ll often encounter situations where crucial figures are missing from your records. Whether it’s the value of hire purchase stock, outstanding installments, or goods returned, these gaps can make it challenging to prepare accurate financial statements. The good news? There’s a systematic approach to calculate these missing figures using memorandum accounts that will help you maintain precise records and determine profits correctly.
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Understanding the challenge of missing figures
In hire purchase transactions, businesses deal with multiple moving parts – goods sold on installments, stock at various locations, customer payments, and returned merchandise. Sometimes, due to incomplete records, fire damage, theft, or simple oversight, certain figures go missing. This creates a puzzle that accountants must solve to prepare the Hire Purchase Trading Account and determine accurate profits.
Think of it like solving a mathematical equation where you know the total but need to find individual components. For instance, if you know your total hire purchase sales were ₹5,00,000, but you’re missing the figure for goods returned by customers, you’ll need to use the available information to work backwards and find that missing piece.
The memorandum account approach
The most effective method for calculating missing figures involves preparing three key memorandum accounts. These accounts act as analytical tools that help you organize known information and identify what’s missing. Let’s explore each one:
Stock at shop account
This account tracks all hire purchase goods physically present at your business premises. It includes both new stock available for sale and repossessed goods returned by customers who defaulted on payments.
The basic format follows this structure:
Debit side includes: Opening stock of hire purchase goods, purchases during the period, and goods repossessed from customers. Credit side shows: Goods sold on hire purchase, closing stock, and any goods lost or damaged.
By entering all known figures and balancing the account, you can determine the missing figure. For example, if you know the opening stock, purchases, and sales, but the closing stock figure is missing, the balancing figure will reveal your closing stock value.
Hire purchase stock account
This account focuses specifically on goods that have been sold on hire purchase but haven’t been fully paid for yet. It represents the stock that legally belongs to your business until customers complete all installment payments.
The account structure includes: Debit entries for: Opening hire purchase stock and goods sold during the period. Credit entries for: Installments received, goods repossessed, and closing hire purchase stock.
This account is particularly useful when you need to find missing figures related to customer payments or the value of outstanding hire purchase transactions. The balancing figure will reveal the missing component once you’ve entered all available information.
Installments due account
This account tracks the money owed by customers for goods purchased on hire purchase. It helps you determine missing figures related to customer payments, defaults, or adjustments.
The account shows: Debit side: Opening balance of installments due and current period’s installments that became due. Credit side: Cash received from customers, installments written off due to defaults, and closing balance of installments due.
When customers default and you repossess goods, the corresponding installments due are typically written off. This account helps you track these adjustments and calculate missing payment figures.
Step-by-step calculation process
Successfully calculating missing figures requires a systematic approach. Start by gathering all available information from your books, including cash receipts, purchase records, and any partial stock counts. Then, identify which specific figures are missing and determine which memorandum accounts will help you find them.
Next, prepare the relevant memorandum accounts by entering all known figures in their proper positions. Leave blank spaces for the missing figures you need to calculate. The key principle is that each account must balance – total debits must equal total credits.
Calculate the balancing figure for each account. This balancing figure represents your missing information. For instance, if the total of known debits exceeds known credits, the difference represents a missing credit item, and vice versa.
Finally, verify your calculations by cross-checking figures across different accounts. The same transaction should appear consistently across relevant accounts, helping you confirm the accuracy of your calculated missing figures.
Practical example walkthrough
Let’s say ABC Electronics has incomplete records for their hire purchase transactions. They know their opening hire purchase stock was ₹2,00,000, they purchased goods worth ₹8,00,000, and received ₹6,50,000 in installments from customers. However, they don’t know their closing stock figure due to a fire that destroyed some records.
Using the Stock at Shop Account, they would debit opening stock (₹2,00,000) and purchases (₹8,00,000), totaling ₹10,00,000. On the credit side, they know goods were sold, and they need to find the closing stock. If they determine from other records that ₹7,50,000 worth of goods were sold on hire purchase, then the closing stock would be ₹2,50,000 (₹10,00,000 – ₹7,50,000).
This calculated figure can then be verified using the Hire Purchase Stock Account, where the same closing stock figure should appear, ensuring consistency across your calculations.
Common challenges and solutions
One frequent challenge is dealing with multiple missing figures simultaneously. When several pieces of information are missing, you might need to prepare all three memorandum accounts and solve them as a system of equations. Start with the account that has the fewest missing figures, calculate what you can, and use those results to solve the other accounts.
Another challenge involves goods returned in damaged condition. These require special treatment because their value might differ from the original hire purchase price. Always use the cash price or current market value for such adjustments, not the hire purchase price.
Timing differences can also complicate calculations. Ensure you’re matching the correct period for all figures – installments due might relate to goods sold in previous periods, while current period sales will generate future installments.
Integration with financial statements
Once you’ve calculated the missing figures, these numbers flow into your main financial statements. The closing hire purchase stock appears in your balance sheet as current assets, while the profit on hire purchase transactions (calculated using the complete figures) appears in your income statement.
The installments due figure represents amounts receivable from customers and should be shown as current assets in your balance sheet. Any bad debts or defaults identified during the calculation process should be properly accounted for in your income statement as losses.
Remember that these calculated figures must be reasonable and consistent with your business operations. If a calculated figure seems unusually high or low, review your calculations and consider whether additional information might be available to verify the results.
What do you think? How would you approach a situation where multiple figures are missing simultaneously, and which memorandum account would you prepare first to start the calculation process?
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