Accounting for Installment Sales

Installment sales is a term used to describe a sale that is done on a deferred payment option. This is most apparent in the 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 a 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 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} 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 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c})
In order to record cash collection of 2011 & 2012, the 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 a 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 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} 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 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} on cost = (4,000 / 14,000) x 100 = 28.57 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}

Jagdesh

Balance Sheet

As on 31^st December, 2012

ASSETS	EQUITIES
Installment A/ Rec 2011 (Note 1)Installment A/ Rec 2012 (Note 2)CashRepossessed inventory	6,3007,00047,6001,35062,250	Def. Gross profit 2011Def. Gross profit 2012Retained earnings	1,8002,00013,450——–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