Record an asset bought on hire purchase using part exchange (old asset not 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 not 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 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).

Before you start

If the old asset is not included in your Capital Assets report in FreeAgent, it’s likely that the old asset was purchased before the FreeAgent start date. Therefore, the value of the old asset and the balance outstanding on the loan should be included as part of the business’s opening balances.

If you haven’t already included the asset, you can add the loan used to buy the old asset as a dummy bank account, as long as there are no account locks in place. Enter the amount of loan outstanding as the opening balance of the bank account, with a minus sign in front of it.

1. Record the purchase of the new asset

First, 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

Next, 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.

3. Record the amount being transferred to the new agreement

As there is still an amount to be paid off from the old HP agreement (which should be the balance of the dummy bank account you created to represent the loan) and transferred over to the new HP agreement, you’ll need to enter another manual bank transaction in the dummy HP bank account.

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’ to complete the process.

4. Create journal entries to complete the disposal

As the old asset is not in the capital asset register in FreeAgent, you’ll need to create the following journal entries for the disposal, dated the same date as the sales invoice:

For the sale price of the old asset excluding VAT, so £5,833.33 in our example:

• Debit code ‘001 - Sales’ or whichever income category you used for the line item on the sales invoice
• Credit ‘461 - Loss/Gain on Disposal of Capital Asset’

For the original cost of the old asset excluding VAT:

• Debit ‘461 - Loss/Gain on Disposal of Capital Asset’
• Credit ‘604 - Disposal of Capital Asset’

For the value of any depreciation posted so far for the old asset, including any that was part of the business’s opening balances:

• Debit ‘607 - Depreciation on Disposal of Capital Asset’
• Credit ‘461 - Loss/Gain on Disposal of Capital Asset’

If you’re unsure which journal entries are required, please ask your accountant.

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.

You may wish to hide the dummy bank account you created for the HP agreement for the old asset, to avoid confusion moving forward.