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

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 repossession150

Gross profit {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} on cost = (4,000 / 14,000) x 100 = 28.57 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}

Jagdesh

Balance Sheet

As on 31^stDecember, 2012

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