Record an asset bought on hire purchase using part exchange (old asset included in capital asset register)

This article explains how to record a capital asset that was bought using a hire purchase (HP) agreement if the purchase involves handing over an old HP asset - that’s included in the capital asset register in FreeAgent - in part exchange.

You can find out whether an asset is included in the capital asset register in FreeAgent by navigating to the Capital Assets report.

If the old asset is not included in the capital asset register in FreeAgent, follow these steps to record the purchase in that scenario instead.

Below is an example of a business that has bought a new asset for £12,000 including 20% VAT. The business has also traded in an old asset for which it has been given a value of £7,000 including 20% VAT. There is also a balance of £3,000 left to pay on the HP agreement for the old asset.

This means the total finance on the new agreement (assuming the balance of the old HP loan is being transferred to the new HP loan agreement) will be £8,000 (£12,000 - £7,000 + £3,000).

1. Record the purchase of the new asset

If the old asset is included in your Capital Assets report in FreeAgent, you’ll first need to add a hire purchase bill for the full value of the new asset.

2. Record the disposal of the old asset

Then, to record the disposal of the old asset, the steps to take depend on whether the old asset was recorded using a dummy bank account or by creating a hire purchase bill.

Old asset recorded using a dummy bank account

If the old asset was recorded by adding a dummy bank account, you’ll need to create a sales invoice for the full value of the sale (part exchange £7,000 including 20% VAT in our example) for the old asset.

You can mark this invoice as paid by adding a manual transaction in the dummy HP bank account in FreeAgent and selecting ‘Invoice Receipt’ as the transaction ‘Type’ and choosing the invoice from the ‘Invoice’ menu.

Select ‘Create and Add Another’ at the bottom of the screen.

Then, you’ll need to enter two manual bank transactions in the dummy HP bank account for the part exchange amount (£7,000 including 20% VAT in our example).

For the first manual bank transaction, select ‘Sales Refund’ as the transaction ‘Type’ and ‘Sales’ from the ‘Category’ drop-down menu. This will net off (cancel out) all the revenue and VAT entries made by the initial invoice and reduce the bank balance by the disposal amount.

Select ‘Create and Add Another’ at the bottom of the screen.

For the second manual bank transaction, select ‘Disposal of Capital Asset’ from the ‘Type’ drop-down menu and select the old asset from the ‘Disposed asset’ drop-down menu. This will complete all the disposal accounting entries, correct the business bank balance and pull the disposal through to the VAT return.

Select ‘Create and Add Another’ at the bottom of the screen.

Record the amount being transferred to the new agreement

Finally, you’ll need to enter a third manual bank transaction in the dummy HP bank account to pay off the amount due to be paid on the old agreement which is being transferred over to the new agreement.

Select ‘Bill Payment’ as the transaction ‘Type’ and select the new hire purchase bill from the ‘Bill’ menu. The value of the transaction should be the difference between the trade-in value of the old asset and the amount of finance still to pay on it, which would be £4,000 in the example above.

Select ‘Create and Finish’ at the bottom of the screen to complete the process.

Old asset recorded by creating a hire purchase bill

If the old asset was recorded by adding a hire purchase bill, you’ll need to create a sales invoice for the full value of the sale (part exchange £7,000 including 20% VAT in our example) for the old asset.

Then you’ll need to enter two manual bank transactions in your business bank account for the trade-in value of the old asset (£7,000 including 20% VAT in our example).

For the first manual bank transaction, select ‘Sales Refund’ as the transaction ‘Type’ and ‘Sales’ from the ‘Category’ drop-down menu. This will net off (cancel out) all the revenue and VAT entries made by the initial invoice and reduce the bank balance by the disposal amount.

Select ‘Create and Add Another’ at the bottom of the screen.

For the second manual bank transaction, select ‘Disposal of Capital Asset’ from the ‘Type’ drop-down menu and select the old asset from the ‘Disposed asset’ drop-down menu. This will complete all the disposal accounting entries, correct the dummy bank balance and pull the disposal through to the VAT return.

Select ‘Create and Add Another’ at the bottom of the screen.

Record the amount being transferred to the new agreement

Finally, you’ll need to enter three more manual bank transactions to pay off the amount due to be paid on the old agreement which is being transferred over to the new agreement.

The first manual bank transaction will be for the trade-in value of the old asset (£7,000 including 20% VAT in our example). Select ‘Invoice Receipt’ from the ‘Type’ drop-down menu and select the invoice you created for the sale of the asset from the ‘Invoice’ menu.

Select ‘Create and Add Another’ at the bottom of the screen.

For the second manual bank transaction, select ‘Bill Payment’ as the transaction ‘Type’ and select the old hire purchase bill from the ‘Bill’ menu. Enter the value that will pay off the bill in full (£3,000 in our example).

Select ‘Create and Add Another’ at the bottom of the screen.

The third manual bank transaction will be for the difference between the part-exchange value of the old asset and the amount that was still outstanding on its loan (£4,000 in our example). This will show that the bill for the new asset is partly covered by the value of the old asset.

Select ‘Bill Payment’ as the transaction ‘Type’ and select the new hire purchase bill from the ‘Bill’ menu.

Select ‘Create and Finish’ at the bottom of the screen to complete the process.

This will update the accounting records to add the new asset in the business’s capital asset register and dispose of the old asset.

You can then explain the hire purchase loan repayments as you pay off the asset each month.