Journal Entries for Instalment Payment System | Buyer & Vendor Entries Explained

Instalment Payment System

Instalment Payment System (also called Deferred Instalments) is a payment method in which the buyer receives both ownership and possession of the goods immediately at the time of signing the contract, while the payment is made in instalments over a period of time.

Under this system, the buyer becomes the owner from day one, unlike the Hire Purchase System where ownership is transferred only after the last instalment is paid.

Key Features

1. The buyer gets possession and ownership of the asset immediately.
2. The price is paid in instalments along with interest, if applicable.
3. The seller cannot repossess the goods if the buyer defaults.
4. In case of non-payment, the seller can sue the buyer for the unpaid balance, but cannot take back the goods.

Buyer and Seller Relationship

1. Buyer: Receives both possession and ownership at the start.
2. Seller/Vendor: Receives a part of the price as down payment and the balance in instalments.

Default in Payment

If the buyer fails to pay any instalment:

1. The seller cannot reclaim the goods.
2. The seller’s only remedy is to file a case to recover the remaining amount.

Example - Sandeep buys a bike from XYZ Automobiles under the Instalment Payment System:

• Cash Price of Bike: ₹80,000
• Down Payment: ₹20,000
• Balance: ₹60,000
• Instalment Amount: ₹10,000
• Number of Instalments: 7
• Total Amount Payable: ₹90,000
• Cash Price: ₹80,000
• Interest for delayed payment: ₹10,000

Definition (According to J.R. Batliboi)

“Installment Purchase System is a system under which there is an agreement to purchase and pay by instalments, the goods which become the property of the purchaser immediately when he receives the delivery of the same.”

Features of the Instalment Payment System

1. Outright Sale of Goods/Assets: The transaction is a complete sale from the beginning.
2. Immediate Transfer of Possession and Ownership: Ownership and possession of the asset pass to the buyer at the time of signing the contract.
3. Payment in Instalments: The buyer is allowed to pay the total price in convenient instalments.
4. No Right of Repossession: If the buyer defaults on payment, the seller cannot take back the goods, but can sue for recovery of the unpaid amount.
5. No Option to Return Goods: The buyer cannot cancel the contract or return the goods unless the contract becomes void or voidable under the Indian Contract Act.

Characteristics of the Instalment Payment System

1. Credit Sale: The entire transaction is treated as a credit purchase.
2. Instalment-Based Payment: The total price is paid in periodic instalments (monthly, quarterly, etc.).
3. Delivery of Goods: The goods are delivered to the buyer at the very beginning.
4. Transfer of Ownership: Ownership passes to the buyer immediately upon agreement.
5. Default in Payment: If the buyer defaults, the seller cannot repossess the goods; legal action is the only remedy.

Difference Between Hire Purchase System and Instalment Payment System

Basis of Difference	Hire Purchase System	Instalment Payment System
1. Nature of Contract	It is an agreement of hiring which later becomes a sale when all instalments are paid.	It is an agreement of outright sale from the beginning.
2. Transfer of Ownership	Ownership remains with the hire vendor until the last instalment is paid.	Ownership transfers to the buyer immediately on signing the agreement.
3. Right to Recover Goods	Hire vendor can repossess the goods if the buyer defaults.	Seller cannot repossess goods; can only sue for unpaid price.
4. Forfeiture of Instalments	Vendor can forfeit all instalments paid in case of default.	Amount paid is treated as part-payment of price; seller can sue only for the balance.
5. Right to Return Goods	Hire purchaser may return goods and stop further liability for future instalments.	Goods cannot be returned unless contract becomes void/voidable.
6. Risk	Risk of loss remains with the vendor until ownership passes.	Risk transfers to the buyer immediately as ownership is transferred at the start.
7. Debtor Status	Hire purchaser is like a tenant, not a debtor until final payment.	Buyer becomes a debtor for the balance amount from the beginning.
8. Right to Sell or Mortgage Goods	Hire purchaser cannot sell, mortgage, pledge, assign, damage, or destroy the goods.	Buyer can sell or mortgage the goods and pass good title to a bona fide purchaser.

Journal Entries for Instalment Payment System

Interest calculation under the Instalment Payment System is done in the same way as the Hire Purchase System.

Key Difference from Hire Purchase

Under the Instalment Payment System:

1. The buyer debits the asset account with the full cash price.
2. The vendor is credited with the full instalment price.
3. The difference between Instalment Price and Cash Price is debited to the Interest Suspense Account (because it relates to multiple years).

Interest for each year is later transferred from Interest Suspense A/c to Interest A/c. 

At year-end, Interest A/c is transferred to the Profit & Loss Account.

Journal Entries in books of Buyer and Vendor

Entries in the Books of the Buyer

1. At the time of Agreement

Asset A/c ....................Dr.   (Total Cash Price)

Interest Suspense A/c ....Dr.   (Total Interest)

      To Vendor A/c (Instalment Price)

(Being asset purchased under instalment system)

2. Down Payment

Vendor A/c ...................Dr.

      To Cash A/c

(Being down payment made)

3. At the End of Each Year

(a) For Interest Due)

Interest A/c ..................Dr.

      To Interest Suspense A/c

(Being current year's interest recognized)

(b) Instalment Paid)

Vendor A/c ...................Dr.

      To Cash A/c

(Being instalment paid)

4. Depreciation Entry

Depreciation A/c ............Dr.

      To Asset A/c

(Being depreciation charged)

5. Transfer to Profit & Loss Account

P & L A/c .....................Dr.

      To Interest A/c

      To Depreciation A/c

(Being annual interest and depreciation transferred)

6. Transfer of Sales to Trading A/c

(Applicable only if the buyer is a trading business holding the asset as inventory)

Sales A/c .....................Dr.

      To Trading A/c

(Being transfer of sales)

Entries in the Books of the Vendor

1. At the time of Agreement

Purchaser’s A/c .............Dr.   (Instalment Price)

      To Sales A/c (Cash Price)

      To Interest Suspense A/c (Total Interest)

(Being goods sold under instalment system)

2. Down Payment Received

Cash A/c .....................Dr.

      To Purchaser’s A/c

(Being down payment received)

3. At the End of Each Year

(a) Interest for the Year)

Interest Suspense A/c ......Dr.

      To Interest A/c

(Being interest for current year credited)

(b) Instalment Received)

Cash A/c .....................Dr.

      To Purchaser’s A/c

(Being instalment received)

4. Depreciation Entry

No Entry

(Vendor does not own the asset.)

5. Transfer to Profit & Loss A/c

Interest A/c .................Dr.

      To P & L A/c

(Being interest transferred to Profit & Loss A/c)

6. Transfer of Sales

No Entry

(Sales already recorded on the date of agreement.)

Illustration  (Instalment Payment System)

Haryana Roadways purchases Buses from Hind Motor Co. Ltd. on instalment purchase system on 1st April, 2013, paying cash ₹1,00,000 and agreeing to pay three further instalments of ₹1,00,000 each on 31st March every year.

The price of the buses is ₹3,72,500. Haryana Roadways writes off depreciation at 10% p.a. on the diminishing balance method. Hind Motor Co. Ltd. charges interest at 5% p.a.

Give journal entries and ledger accounts in the books of both the parties. Accounts are closed on 31st March every year.

Solution

Calculation of Interest

Particulars	Cash Price	Principal	Interest @ 5%	Instalments
Cash Price	3,72,500
Less: Down payment	1,00,000	1,00,000	–	1,00,000
	2,72,500
Less: Cash price in 1st instalment	86,375	86,375	13,625	1,00,000
	1,86,125
Less: Cash price in 2nd instalment	90,694	90,694	9,306	1,00,000
	95,431
Less: Cash price in 3rd instalment	95,431	95,431	4,569	1,00,000
			27,500	4,00,000
Total	3,72,500	3,72,500	27,500	4,00,000

In the Books of Haryana Roadways

Journal

2013–14

01.04.13

Buses A/c — Dr. ₹ 3,72,500

Interest Suspense A/c — Dr. ₹ 27,500

    To Hind Motor Co. Ltd. ₹ 4,00,000

(For buses purchased on instalment system)

01.04.13

Hind Motor Co. Ltd. — Dr. ₹ 1,00,000

    To Cash A/c ₹ 1,00,000

(For down payment made)

31.03.14

Interest A/c — Dr. ₹ 13,625

    To Interest Suspense A/c ₹ 13,625

(For interest due)

31.03.14

Hind Motor Co. Ltd. — Dr. ₹ 1,00,000

    To Cash A/c ₹ 1,00,000

(For payment of the 1st instalment)

31.03.14

Depreciation A/c — Dr. ₹ 37,250

    To Buses A/c ₹ 37,250

(For depreciation @ 10% on ₹ 3,72,500)

31.03.14

P & L A/c — Dr. ₹ 50,875

    To Interest A/c ₹ 13,625

    To Depreciation A/c ₹ 37,250

(For transfer of interest and depreciation to P&L A/c)

2014–15

31.03.15

Interest A/c — Dr. ₹ 9,306

    To Interest Suspense A/c ₹ 9,306

(For interest due)

31.03.15

Hind Motor Co. Ltd. — Dr. ₹ 1,00,000

    To Cash A/c ₹ 1,00,000

(For payment of the second instalment)

31.03.15

Depreciation A/c — Dr. ₹ 33,525

    To Buses A/c ₹ 33,525

(For depreciation @ 10% on ₹ 3,35,250)

(Working: 3,72,500 – 37,250 = 3,35,250)

31.03.15

P & L A/c — Dr. ₹ 42,831

    To Interest A/c ₹ 9,306

    To Depreciation A/c ₹ 33,525

(For transfer of interest and depreciation to P&L A/c)

2015–16

31.03.16

Interest A/c — Dr. ₹ 4,569

    To Interest Suspense A/c ₹ 4,569

(For interest due)

31.03.16

Hind Motor Co. Ltd. — Dr. ₹ 1,00,000

    To Cash A/c ₹ 1,00,000

(For payment of the third instalment)

31.03.16

Depreciation A/c — Dr. ₹ 30,173

    To Buses A/c ₹ 30,173

(For depreciation @ 10% on ₹ 3,01,725)

(Working: 3,35,250 – 33,525 = 3,01,725)

31.03.16

P & L A/c — Dr. ₹ 34,741

    To Interest A/c ₹ 4,569

    To Depreciation A/c ₹ 30,172

(For transfer of interest and depreciation to P&L A/c)

In the Books of Hind Motor Co. Ltd. – Journal

Date	Particulars	L.F.	Dr (₹)	Cr (₹)
2013-14
01.04.13	Haryana Roadways A/c Dr. To Sales A/c To Interest Suspense A/c (For buses sold on instalment payment system)		4,00,000	3,72,500 27,500
01.04.13	Cash A/c Dr. To Haryana Roadways A/c (For down payment received)		1,00,000	1,00,000
31.03.14	Interest Suspense A/c Dr. To Interest A/c (For interest due)		13,625	13,625
31.03.14	Cash A/c Dr. To Haryana Roadways A/c (For 1st instalment received)		1,00,000	1,00,000
31.03.14	Interest A/c Dr. To P & L A/c (For interest transferred to P & L A/c)		13,625	13,625
31.03.14	Sales A/c Dr. To Trading A/c (For transfer of sales to Trading A/c)		3,72,500	3,72,500
2014-15
31.03.15	Interest Suspense A/c Dr. To Interest A/c (For interest due)		9,306	9,306
31.03.15	Cash A/c Dr. To Haryana Roadways A/c (For 2nd instalment received)		1,00,000	1,00,000
31.03.15	Interest A/c Dr. To P & L A/c (For interest transferred to P & L A/c)		9,306	9,306
2015-16
31.03.16	Interest Suspense A/c Dr. To Interest A/c (For interest due)		4,569	4,569
31.03.16	Cash A/c Dr. To Haryana Roadways A/c (For 3rd instalment received)		1,00,000	1,00,000
31.03.16	Interest A/c Dr. To P & L A/c (For interest transferred to P & L A/c)		4,569	4,569

Buses Account Ledger

Date	Particulars	Debit (₹)	Date	Particulars	Credit (₹)
01.04.13	To Hind Motor Co. Ltd.	3,72,500	31.03.14	By Depreciation A/c	37,250
			31.03.14	By Balance c/d	3,35,250
Total		3,72,500			3,72,500
01.04.14	To Balance b/d	3,35,250	31.03.15	By Depreciation A/c	33,525
			31.03.15	By Balance c/d	3,01,725
Total		3,35,250			3,35,250
01.04.15	To Balance b/d	3,01,725	31.03.16	By Depreciation A/c	30,173
			31.03.16	By Balance c/d	2,71,552
Total		3,01,725			3,01,725

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