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 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 the installment sale transaction | ||
| Adjusting Entry | ||
| Unrealized gross profit | Debit | |
| 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.