What classification does 'Hire Purchase' fall under?

Hire purchase agreements are financial arrangements through which a buyer can obtain goods by making installment payments over time. In accounting, hire purchase is recognized as a liability because it represents an obligation to pay for an asset.

When a company enters into a hire purchase agreement, the asset acquired is typically not fully paid for at the time of acquisition; hence, it creates a liability that will be settled over a period of time. This liability is recorded as a non-current liability if the payment terms exceed one year. This classification reflects that the company will not be required to settle the obligation within the next financial year, distinguishing it from current liabilities, which are due within a year.

Understanding this classification is critical because it affects how the company's financial position is presented. Non-current liabilities are part of a company's long-term financing structure, distinguishing them from current liabilities that will be settled in the short term. Thus, hire purchase is accurately classified as a non-current liability.