Sometimes you don't buy an asset outright, but buy it over time on a lease purchase or hire purchase (HP) agreement. This article explains how to account for that in FreeAgent.
Please note, this only applies to assets you're buying, not to those you're hiring. Sometimes it's difficult to distinguish between the two if the legal arrangement is complex. Check with your accountant if you're not sure.
1 New bank account for the hire purchase agreement
Set up a new bank account by navigating to the 'Banking' tab at the top of the screen and selecting 'Bank Accounts' from the drop-down menu.
From the 'Bank Accounts Summary' page, select 'New' and choose 'Bank Account'.
Call it something like "Computer Hire Purchase" and don't tick either the 'This is a Personal Account' or 'Make this my Primary Account' boxes.
If you're buying several different assets on hire purchase, set up a new bank account for each one.
2 Enter the asset as a bill
Enter the asset as a bill to one of the capital asset categories, then mark that bill as paid from the new bank account you set up at step 1.
I've bought a computer on hire purchase that cost me £1,200 + VAT, so I would enter the computer as a bill, using the category Computer Equipment Purchase (preferably with a copy of the hire purchase agreement attached).
You can upload a scanned image of the agreement by choosing 'Select a file' from the 'File to attach' area. If you have a receipt, invoice or bill, saved as an image file (PNG or JPEG) or PDF on your mobile device or as an email attachment, you can import it into your 'Files' area using the FreeAgent mobile app. To upload an imported file, select 'Choose from saved files' instead and follow the instructions.
3 Enter bill payment in the Hire Purchase account
I would then set up a bill payment from the hire purchase bank account for that computer, and make the payment in full with a manual bank transaction dated the same day as the bill.
Remember not to use the 'Add a manual payment' button when you're entering the bill payment, as you won't be paying it from the primary bank account.
4 Paying off the hire purchase loan
Each month I'm paying £45.20 to the hire purchase company.
I'll explain this in my main bank account in FreeAgent as a Transfer to Another Account, the other account being the hire purchase account, like this.
5 Interest on the hire purchase agreement
Of each of my monthly payments to the hire purchase company, £12.57 is interest.
So I'd enter a monthly manual bank transaction from the hire purchase bank account, with type 'Payment' and category 'Interest Payable', like this.
Using this method means the capital asset is included in full in my accounts, so is the amount I owe to the hire purchase company (which is the balance on the hire purchase bank account), and I'm correctly accounting for the interest on the hire purchase.
HMRC also say that if you're buying an asset on hire purchase, even if you're normally cash accounting for VAT, you should account for VAT on the invoice basis when you "buy or sell goods using lease purchase, hire purchase, conditional sale or credit sale".
So, how you'd account for the VAT if you're cash accounting, will depend on the VAT invoice that your supplier gives you.
They may give you just one VAT invoice for the asset itself, in which case, you're fine.
But they may give you a schedule of VAT invoices, with, in effect, a VAT invoice for each month's payment.
If this is true in your case, once you've posted the original purchase of your asset, post two journal entries dated the same day as your asset purchase, to move the full amount of the VAT to the Deferred VAT account. In the above example, that would be £200 of VAT.
Then, each month, once you've posted your payment, journal the VAT on that payment only (and your schedule from your hire purchase company will show you how much that is), debiting code 818 and crediting code 823.
If you get stuck with VAT postings, please ask your accountant, or contact us for support on email@example.com.
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