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What Is An Installment Sale?: Revenue Expense

An installment sale allows a buyer to purchase goods and pay for them over time in periodic installments. Under the installment sales method, revenue and expenses are recognized as cash payments are received rather than at the time of sale. This conservative approach defers full revenue recognition until payment is received because ownership is not fully transferred up front and the amount ultimately collected is uncertain. Journal entries debit cash for payments received and credit unearned revenue, recognizing earned revenue proportionally over the installment period.

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111 views8 pages

What Is An Installment Sale?: Revenue Expense

An installment sale allows a buyer to purchase goods and pay for them over time in periodic installments. Under the installment sales method, revenue and expenses are recognized as cash payments are received rather than at the time of sale. This conservative approach defers full revenue recognition until payment is received because ownership is not fully transferred up front and the amount ultimately collected is uncertain. Journal entries debit cash for payments received and credit unearned revenue, recognizing earned revenue proportionally over the installment period.

Uploaded by

samuel debebe
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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What is an Installment Sale?

An installment sale is a financing arrangement in which the seller allows the


buyer to make payments over an extended period of time. In an installment
sale, the buyer receives the goods at the beginning of the installment
period and makes payments over the installment
period. Revenue and expense are recognized at the time of cash collection
and not at the time of sale.

 
 

Installment Sales Method of Revenue Recognition

The installment sales method of revenue recognition defers revenue


recognition until cash from the sale is received. Therefore, the installment
sales method is a conservative method of revenue recognition as revenue is
not immediately recognized at the point of sale. The installment sales
method is only applied in situations where ownership is not fully
transferred at the time of sale. In addition, this method is used when there
is a degree of uncertainty over the amount that will be collected (therefore,
it would be inappropriate to recognize all revenue at the time of sale).

Journal Entries

The journal entries for installment sales are as follows:

 
 

Example of Installment Sales Method

Company A is a furniture company and makes a sale for a piece of furniture


with a retail price of $10,000 at the end of January. The cost of the furniture
to the company is $4,000. Therefore, the gross margin for this good is 60%.

The company strikes a deal with the customer in which the customer is
required to make installment payments of $2,500 each month for the
furniture until the full amount is paid ($10,000).

 
 

The journal entries for Company A would be as follows:

 
 
 

The journal entries for the end of March, April, and May would be the same
as the journal entry above.

Key Takeaways

 An installment sale allows the buyer to make payments over an


extended period of time.
 Revenue recognition recognizes revenue and expense at the time of
cash collection and not at the time of sale.
 Used when ownership is not fully transferred at the point of sale.
 Used when there is a degree of uncertainty in the collection of cash.

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