Record an asset bought on hire purchase

This article explains how to record a capital asset that was purchased on a hire purchase (HP) agreement.

Please note that this only applies to assets that you're buying, not to those that you're hiring. It can be difficult to distinguish between the two if the legal arrangement for the asset is complex. Please check with your accountant if you're unsure.

1. Add a bill for the asset

First, add a bill and enter the date that the hire purchase agreement ends in the ‘Due On’ field in the ‘Bill Details’ section. You can also add the details of the hire purchase agreement with the finance company in the ’Comments’ box if you wish.

Enter the details for the purchase in the 'Bill Contents' section and select the relevant asset purchase category from the bottom of the ‘Spending Category’ drop-down menu. You can create custom categories if you need to. If you’re unsure which spending category to select, please ask your accountant.

Select whether you’d like any depreciation to be calculated using the ‘Straight line’ or ‘Reducing balance’ method, or whether the asset should not depreciate.

If you select the ‘Straight line’ method, select the number of years that the asset will be useful to the business from the ‘Asset life’ drop-down menu. Please note that you can select a maximum of 25 years.

If you select the ‘Reducing balance’ method, enter the relevant percentage in the ‘Depreciation rate’ field. If you’re not sure what percentage to choose, please ask your accountant.

Once you’ve entered all of the relevant information for the asset purchase, select ‘Save and Review’ to complete the process. If you need to record additional costs for the purchase, such as insurance, you can add multiple line items to the bill.

If you're buying several different assets on hire purchase, you’ll need to create a separate bill for each asset.

2. Add a new bank account for the hire purchase agreement

Next, add a new bank account and enter a name that clearly describes the asset in the ‘Account Name’ field and don't tick either the 'This is a personal account' or 'Make this my primary account' checkboxes.

Select ‘Create new account’ at the bottom of the screen to complete the process. If you're buying several different assets on hire purchase, you’ll need to add a new bank account for each asset.

3. Mark the bill as paid

Next, add a manual bank transaction from the hire purchase bank account that you created for the asset as a bill payment dated the same day as the bill Don’t use the 'Add a manual payment' button on the bill as this will pay it from your primary business bank account.

To do this, navigate to the ‘More’ button and select ‘Add Transaction’ from the drop-down menu in the top-right of the hire purchase bank account.

Select ‘Bill Payment’ from the ‘Type’ drop-down menu and select the relevant bill from the ‘Bill’ drop-down menu.

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

4. Explain the hire purchase loan repayments

As you pay off the asset each month, you'll need to explain each payment in your business bank account in FreeAgent once the relevant bank transaction has been imported into your FreeAgent account via a bank feed or uploaded from a bank statement.

To do this, navigate to the hire purchase loan payment in your business bank account select ‘Transfer to Another Account’ from the ‘Type’ drop-down menu and select the hire purchase bank account from the ‘Bank Account’ drop-down menu.

Select ‘Explain transaction’ to complete the process.

5. Record any interest on the hire purchase agreement

If you're paying interest on the hire purchase agreement, you’ll also need to enter a manual bank transaction from the hire purchase bank account each month to reflect the interest.

To do this, navigate to the ‘More’ button and select ‘Add Transaction’ from the drop-down menu in the top-right of the hire purchase bank account.

Select ‘Payment’ from the ‘Type’ drop-down menu and ‘Interest Payable’ from the ‘Category’ drop-down menu.

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