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Installment Sales Accounting Method

The installment-sales method recognizes revenues and costs of sales at the time of sale but defers the gross profit to the periods when cash is collected. It recognizes selling and administrative expenses immediately rather than deferring them. Journal entries are made at the time of sale to record revenues, costs of goods sold, and deferred gross profit. In subsequent periods, entries are made to remove gross profit from the deferred amount and recognize it as income based on the cash collected during that period.

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Wawex Davis
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99 views4 pages

Installment Sales Accounting Method

The installment-sales method recognizes revenues and costs of sales at the time of sale but defers the gross profit to the periods when cash is collected. It recognizes selling and administrative expenses immediately rather than deferring them. Journal entries are made at the time of sale to record revenues, costs of goods sold, and deferred gross profit. In subsequent periods, entries are made to remove gross profit from the deferred amount and recognize it as income based on the cash collected during that period.

Uploaded by

Wawex Davis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

Installment-Sales Method

Recognizes income in the periods of collection rather than in


the period of sale.

Recognize both revenues and costs of sales in the period of


sale, but defer gross profit to periods in which cash is
collected.

Selling and administrative expenses are not deferred.


Illustration

2012 2013 2014

Installment Sales 2,00,000 2,50,000 2,40,000


Cost of Installment sales 1,50,000 1,90,000 1,68,000

Gross profit 50,000 60,000 72,000

Rates of gross profit on sales 25% 24% 30%

Cash receipts
2012 sales 60,000 1,00,000 40,000
2013 sales 1,00,000 1,25,000
2014 sales 80,000
Journal Entries for 2012
1. Installment Accounts Receivable,2012 2,00,000
Installment 2,00,000
(to record sales made on installment in 2012)

2. Cash 60,000
Installment Account Receivable,2012 60,000
(To record cash collected on installment receivable)

3. Cost of Installment Sales 1,50,000


Inventory 1,50,000
(To record cost of goods sold on installment in 2012)

4. Installment Sales 2,00,000


Cost of Installment Sales 1,50,000
Deferred gross profit 50,000
(To close installment sales and cost of installment sales)

5. Deferred Gross Profit 15,000


Realized Gross Profit 15,000
( To remove from deferred gross profit the profit realized
through cash collections: 60,000x25%)

6. Realized Gross Profit 15,000


Income Summary 15,000
( To close profit realized by collections)
Journal Entries for 2013
1. Installment Accounts Receivable,2013 2,50,000
Installment 2,50,000
(to record sales made on installment in 2013)

2. Cash 2,00,000
Installment Account Receivable,2012 1,00,000
Installment Account Receivable,2013
(To record cash collected on installment receivable)

3. Cost of Installment Sales 1,90,000


Inventory 1,90,000
(To record cost of goods sold on installment in 2013)

4. Installment Sales 2,50,000


Cost of Installment Sales 1,90,000
Deferred gross profit 60,000
(To close installment sales and cost of installment sales)

5. Deferred Gross Profit,2012 25,000


Deferred Gross Profit,2013 24,000
Realized Gross Profit 49,000
( To remove from deferred gross profit the profit realized
through cash collections)
6. Realized Gross Profit 49,000
Income Summary 49,000
( To close profit realized by collections)

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