Basis of Recording Profit and Loss on Installment Sales

As the installment sales involve profit-earning over a long period of time. The 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 the full amount of the sales is charged at the time of sale. The loss on the deferred payments is estimated using the same method of allowance for doubtful debt as in credit sale.

Journal Entry

Installment Accounts ReceivableDebit
 Installment SalesCredit
Recording of the installment sale transaction
Cost of Installment salesDebit
 PurchasesCredit
Recording of the cost of the asset and closing the purchase account
CashDebit
 Installment Accounts ReceivableCredit
Recording of cash from customer against installment payment
Bad Debt ExpensesDebit
 Allowance for doubtful debtCredit
Creating Allowance for doubtful debt against customers.
Repossessed merchandiseDebit
Unrealized gross profitDebit
Gain or loss on repossessionDebitCredit
 Installment accounts receivableCredit
Recording of gain or loss on repossession of the asset from customer due to non-payment
Closing Entries
Installment salesDebit
 Cost of installment salesCredit
 Unrealized gross profitCredit
Recording of unrealized gross profit on the installment sale transaction
Adjusting Entry
Unrealized gross profitDebit
 Realized gross profitCredit
Recording the realized gross profit on the 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.