Accounting for Installment Sales

Installment sales involve transactions where goods are sold, and payment is received in a series of future installments rather than a single upfront amount. This sales method is common for high-value items, such as real estate, vehicles, and large equipment, where the buyer’s ability to pay over time is an important factor. Accounting for installment sales addresses the recognition of revenue, profit, and related receivables in accordance with the uncertainty of cash collection.

Installment Method: Revenue and Profit Recognition

The installment method recognizes revenue and profit proportionally as cash is collected, rather than at the point of sale. This method is used when collectibility of the receivable is not reasonably assured at the time of sale.

Key features:

• Gross profit is recognized in proportion to the cash received.

• Each cash collection is split between cost recovery and profit.

Calculation of Gross Profit Percentage

Gross profit percentage is calculated at the time of sale and is applied to each cash collection.

Formula:

Gross Profit % = (Sales – Cost of Goods Sold) / Sales

Example:

• Sales price: $100,000

• Cost of goods sold: $70,000

• Gross profit: $30,000

• Gross profit %: 30%

Journal Entries for Installment Sales

At the time of sale:

 Dr. Installment Accounts Receivable (total contract)

  Cr. Sales

 Dr. Cost of Goods Sold

  Cr. Inventory

As cash is collected:

 Dr. Cash

  Cr. Installment Accounts Receivable

 Dr. Deferred Gross Profit

  Cr. Realized Gross Profit

The deferred gross profit account tracks the portion of profit not yet recognized.

Recognition of Profit as Cash Is Received

For each installment received, apply the gross profit percentage to determine the realized gross profit.

Example:

• Cash collected in year: $40,000

• Gross profit realized: $40,000 × 30% = $12,000

• Deferred gross profit reduced by $12,000; realized gross profit reported on the income statement.

Installment Method vs. Cost Recovery Method

• Installment method: Recognizes profit in proportion to cash collections.

• Cost recovery method: No profit is recognized until all costs have been recovered; used when even greater uncertainty exists.

Disclosure Requirements

Companies using the installment method must disclose:

• Total amount of installment receivables outstanding

• Amount of deferred gross profit

• Methods and assumptions used for revenue recognition

Transition under ASC 606 and IFRS 15

Current standards (ASC 606 and IFRS 15) require revenue recognition based on the transfer of control, but the installment method remains relevant in situations where collection is highly uncertain and variable consideration constraints apply.

Relevant Accounting Standards

• US GAAP: ASC 606 – Revenue from Contracts with Customers (installment method, legacy guidance in ASC 605-10-S99)

• IFRS: IFRS 15 – Revenue from Contracts with Customers

Summary Table: Installment Sales Accounting

Stage	Journal Entry	Financial Impact
At sale	Dr. Receivable / Cr. Sales	Increases receivables and sales
As cash is collected	Dr. Cash / Cr. Receivable	Increases cash, decreases receivable
Profit recognition	Dr. Deferred GP / Cr. Realized GP	Moves profit to income statement

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