The usual method of accounting for recognition of revenue is Accrual Method, but there is 3 exceptions:
- Installment Sales – profit is recognized at the point of sale.
- Long Term Construction – recognized sales gains and losses even at the point of contract is not finished.
- Franchise Accounting – at the standpoint of Franchisor.
Cost Recovery Method – whenever there is a collection the cost part should be realized first before recognizing profit.
Sales – 100 Sales 100%
COS – 70 COS 70 %
Gross Profit 30 GP rate 30%
70 should be collected first before the realization of 30 as a profit, (subsequent collection).
Installment Sales Method – There is always a cost part and a profit part upon cash collection.
Sample Problem for Installment Sales:
At the end of 2009 CPA Realty Corp. sells 1,200,000 property that had a cost of 900 000. Terms of sale, 10% downpayment, balance paid in monthly installments of 30 000 . Indicate profit to be recognized in 3 years, used
GP Rate 25%
Installment AR dr 1 080 000
Cash dr 120 000
Installment Sales cr 1 200 000
Cost Of Sales dr 900 000
Inventory cr 900 000
Unrealized Gross Profit dr 300 000
Deferred Gross Profit cr 300 000
*Installment Sales Account don’t close to Income Summary Account.
Cash dr 360 000
Installment Sales AR cr 360 000
Entry for Repossession:
Repossessed Merchandise dr xx
Deferred Gross Profit dr xx
Loss On Repossession dr xx
Installment Account Receivable cr xx
Gain or Loss on Repossession should be recognized.
Decrease in Installment Account Receivable should also decreased the Deferred Gross Profit on Repossession.
Year End Adjustment
Deferred Gross Profit dr xxx
Realized Gross Profit cr xxx