Accounting for Installment Sales

Installment sales is a term used to describe a sale which is done on a deferred payment option. This is most apparent in real estate business where the builders and developers transfer the apartments or flats over a number of periods by taking monthly, quarterly and yearly payments.

In the electronics industry, the dealers also sell the electronics items on installment sales method. So, there is a huge volume of transactions in the industry. Here comes the role of Accounting for Installment Sales.

In the installment sale, the buyer gets the ownership of the asset by making the small amount of down payment. Later, he or she needs to pay the periodic equal amount of fees to pay off the remaining liabilities. 

Example 1

Jagdesh is involved in selling electronics items such as digital camera, mobile phones and power banks. He uses installment sale basis to grow its business. The balances of the installment sales are as under:

Installment account receivables $ 14,000

Unrealized gross profit $ 4,000

The following transactions occurred during the year 2012:

Installment sales $ 49,000

Recoveries of installments for the year 2012: $ 42,000

Recoveries of installments for the year 2011: $ 5,600

Installment contract cancelled of 2001: $ 2,100

Goods repossessed from customers valued at $ 1,350

In both years, the electronics items have been sold at a price 40 % above the cost.

Required

  1. Record entries for the year 2012.
  2. Pass on closing & adjusting entries for 2012.
  3. Show how the relevant accounts will be presented in the statement of financial position (Balance sheet) in December 31, 2012.

Solution

Particulars

Debit

Credit

In order to record installment sales, we will pass the following entry:

   

Installment account receivable

49,000

 

Installment sales

 

49,000

     

Now, we will record cost of installment sales as follows:

   

Cost of goods sold

35,000

 

Inventory

 

35,000

(49,000 / 140 %)

   
     

In order to record cash collection of 2011 & 2012, following entry will be recorded:

   

Cash

47,600

 

Accounts receivable installment – 2011

 

5,600

Accounts receivable installment – 2012

 

42,000

     

In order to record loss over repossession, this entry will be recorded:

   

Reposed inventory

1,350

 

Unrealized gross profit

600

 

Loss on repossession

150

 

Accounts receivable Installment 2011

 

2,100

     

Now, we will close installment sales & Cost of goods sold account as follows:

   

Installment sales

49,000

 

Cost of goods sold

 

35,000

Unrealized gross profit

 

14,000

     

To record realized gross profit of both years, the entry would be:

   

Unrealized gross profit 2011

1,600

 

Unrealized gross profit 2012

12,000

 

Realized gross profit

 

13,600

     

In order to close several accounts in retained earnings, this entry will be recorded:

   

Realized gross profit

13,600

 

Retained earning

 

13,450

Loss on repossession

 

150

Calculation

Realized gross profit = gross profit % x cash recovery

Realized gross profit – 2011 = 5,600 x 40/140 = 1,600

Realized gross profit – 2012 = 42,000 x 40/140 = 12,000

Gain or loss on repossession

Installment accounts receivables 2,100

Less: unrealized gross profit 2,100 x 40/140 (600)

Cost of goods sold 1,500

Less: repossessed inventory (1,350)

Loss on repossession 150

Gross profit % on cost = (4,000 / 14,000) x 100 = 28.57 %

Jagdesh

Balance Sheet

As on 31st December, 2012

ASSETS

EQUITIES

Installment A/ Rec 2011 (Note 1)

Installment A/ Rec 2012 (Note 2)

Cash

Repossessed inventory

6,300

7,000

47,600

1,350

62,250

Def. Gross profit 2011

Def. Gross profit 2012

Retained earnings

1,800

2,000

13,450

--------

17,250

Notes

  1. Installment Accounts receivables 2011 = 14,000 – 2,100 – 5,600 = $ 6,300
  2. Installment Accounts receivables 2012 = 49,000 – 42,000 = $ 7,000