Basis of Recording Profit and Loss on Installment Sales

As the installment sales involve profit earning over a long period of time. Accountant uses two different methods for recording Profit and Loss on Installment Basis.

Methods

1. The accrual basis

2. The installment basis

1. The accrual basis

Under this basis, the sale is treated as a credit sale and therefore full amount of the sales in charged at the time of sale. The loss on the deferred payments is estimated using the using the same method of allowance for doubtful debt as in credit sale.

Journal Entry

Installment Accounts Receivable Debit  
   Installment Sales   Credit
     
Recording of the installment sale transaction    
     
Cost of Installment sales  Debit  
   Purchases   Credit 
     
Recording of the cost of the asset and closing the purchase account    
     
Cash  Debit  
   Installment Accounts Receivable   Credit 
     
Recording of cash from customer against installment payment    
     
Bad Debt Expenses Debit  
   Allowance for doubtful debt  

Credit

     
Creating Allowance for doubtful debt against customers.    
     
Repossessed merchandise  Debit  
Unrealized gross profit  Debit   
Gain or loss on repossession Debit  Credit 
   Installment accounts receivable    Credit 
     
Recording of gain or loss on repossession of the asset from customer due to non-payment    
     
Closing Entries
Installment sales Debit  
   Cost of installment sales   Credit
   Unrealized gross profit   Credit
Recording of unrealized gross profit on installment sale transaction    
     
Adjusting Entry
Unrealized grossprofit Debit  
   Realized gross profit   Credit
Recording the realized gross profit on installment sale transaction    

 2. The Installment Basis

In this method, profit is recognized gradually in the period of the collection. Every amount of the collection is charged against the purchase and the profit.