Business – 5.2 Sources of finance – Internal and external sources | e-Consult

Answer:

• Key Differences

  • Leasing: The lessee obtains the right to use the asset for a period; ownership usually remains with the lessor. Payments are treated as operating expenses (unless it is a finance lease).
  • Hire Purchase (HP): The buyer acquires the asset immediately, paying an initial deposit plus instalments that include interest. Ownership transfers after the final payment.

• Illustrative Accounting – First Year

  1. Leasing (Operating Lease)

     • Profit‑and‑Loss Account: Lease payment of £6,000 (assuming £500 per month) recorded as an expense.
     • Balance Sheet: No asset or liability recorded (operating lease off‑balance‑sheet).

  2. Hire Purchase

     • Initial Entry (at purchase):

       Dr Equipment £30,000

       Cr HP Liability £30,000

     • First‑Year Payments (assume £6,000 total, £2,000 interest, £4,000 principal):

       • Profit‑and‑Loss: Interest expense £2,000.
       • Balance Sheet: Reduce HP liability by £4,000; equipment remains at £30,000 (depreciated separately).

     • Depreciation (straight‑line over 5 years): £6,000 charge to P&L and accumulated depreciation on the balance sheet.