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.


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