Installment Sales

The usual method of accounting for recognition of revenue is Accrual Method, but there is 3 exceptions:

  1. Installment Sales – profit is recognized at the point of sale.
  2. Long Term Construction  – recognized sales gains and losses even at the point of contract is not finished.
  3. 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.

Example:

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

Sales  100%

COS    75%

GP Rate 25%

ISM

Entry  :

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.

Collection:

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

 

 

 

 

Advertisements

About Jonathan Ruiz CPA

Newbie Mentor and one of the influential author in the Philippines setting. His also the founder of PAM Academy and Developer of PAM PSE TRACKER application.
This entry was posted in Practical Accounting 2, Uncategorized and tagged , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s