Hire agreements

[David Cousens]

Hi Alex

If you treat the printer as an asset, you would have to writeoff the 
printer as a depreciation of its initial value over the period of the 
agreement and you would record the start of the hire agreement as

Asset:Printer:InitialValue                      debit  £26,022.20
Liability:Printer Hire Agreement                      credit £26,022.20

Each quarterly payment would be recorded as

Liability:Printer Hire Agreement   debit  £1,301.11
Asset Checking Account                                credit  £1,301.11

To record the printer depreciation you have to set up an asset contra 
account, i.e. an account whose balance is subtracted from the Asset: 
Printer account. This can be done with a Parent Account 
Asset:Printer:CurrentValue  which has as child accounts both
Asset:Printer:InitialValue and Asset:Printer:Depreciation. When you make 
each quarterly payment you would then also record the asset depreciation 
as follows.

Asset:Printer:Depreciation                           credit  £1,301.11
Expense:Printer               debit  £1,301.11.

The accumulated balance of the Asset:Printer:Depreciation is subtracted 
from the InitialValue account to give the balance of the CurrentValue 
account which records its decreasing value. This is a bit complex but 
will give you a complete record of the initial purchase, record the 
original value of the asset and its depreciated value reaching 0 at the 
end of the hire period.

You may need to check your taxation law in the UK on such hire 
agreements as there can be limitations on what can be written off and 
when in the taxation legislation which are jurisdiction dependent.

Pays to check it out with an accountant when you prepare your tax 
return. Again the procedure would be the same but the amounts  of the 
depreciation and Expense splits may vary and you may have to deal with a 
residual book value at the end of the term normally with a write off of 
an residual value similar to the above transaction. As the hire company 
buys the printer back at 0 value, the above treatment is most likely to 
be applicable.

Cheers

David Cousens

On 01/05/2016 08:26 AM, Alex wrote:
> My company has got a hire agreement for a print machine. At the end of
> the hire agreement the machine has to be returned to the supplier so is
> of no value to us.
>
> There are 20 equal quarterly payments to be made of £1,301.11, which to
> me suggests at the start of the agreement we have a liability of
> £26,022.20.
>
> I think I would like to show the quarterly payment -
>
> 1. reducing the liability;
> 2. reducing the checking account;
> 3. increasing the expense account;
>
> Is this the correct way to account for these agreements?
> If so how would I go about it.
>
> Alex
>

-- 
*Dr David R Cousens* B.Sc.(Physics), M. Prof. Acc., Ph.D. (Physics),
Grad.Cert. Ed.