Installment Sale Journal Entry
Installment Sale is the sale transaction that seller allows the buyer to make payment over a long period of time. This sale transaction mostly happens for the sale of goods rather than services. The buyer will receive goods at the beginning and make the full payment over the agreed period.
The seller may require the buyer to pay a certain percentage of the total purchase to secure the purchase. The seller does not wish to allow the buyer to make installments for the whole amount as it is a very high risk. Some sellers may retain the ownership of the goods until all the payments are made, they only allow the buyer to use products without any ownership documents.
The seller will retain the right to bring back the goods if buyer fails to make subsequent payments. They must prepare a proper term and condition in the sale agreement. So it means that risk and reward are not fully transferred from seller to buyer.
The seller will record revenue and cost of goods sold when the cash is collected not at the time of sale. It is very hard to define the time of sale as the goods is given to customers but not the ownership. The buyer may return the goods to seller for some reason, it depends on the agreement between both parties. Moreover, the seller has the right to bring back the products if the buyer fails to make the installment payment.
Installment Sale Journal Entry
At the beginning of the installment sale, seller only records the receivable account and decreases the inventory from the report. At the same time, they need to record the deferred gross profit which is the difference between the amount received and the cost of inventory. It is also the difference between revenue and cost of goods sold that will be recorded later.
The journal entry is debiting installment receivable and credit inventory & deferred gross profit.
| Account | Debit | Credit |
|---|---|---|
| Installment Receivable | ### | |
| Inventory | ### | |
| Deferred Gross Profit | ### |
Installment receivable is the amount that seller expects to receive from buyer, and it is presented under account receivable on balance sheet. Inventory is decreased from the balance sheet while the deferred gross profit will be classified as the contra account of installment receivable.
When the buyer makes a payment, seller will record debit cash and credit the receivable amount. The journal entry is debiting cash and credit installment receivable.
| Account | Debit | Credit |
|---|---|---|
| Cash | ### | |
| Installment Receivable | ### |
The seller also records the revenue and cost of goods sold and reverses the deferred gross profit. The amount of revenue and cost of goods sold will depend on the proportion of buyer payment.
The journal entry is debiting COGS, deferred gross profit, and credit revenue.
| Account | Debit | Credit |
|---|---|---|
| COGS | ### | |
| Deferred Gross Profit | ### | |
| Revenue | ### |
COGS and Revenue will be present on the income statement. The deferred gross profit will be removed from balance as well. When the buyer pays 100%, the deferred gross profit will be zero.
Installment Sale Journal Entry Example
ABC is the car company, and it sold a car to XYZ on the installment deal. On 01 June, ABC sells the car for $ 100,000 and allow XYZ to pay based on below schedule:
- 20% on 07 June
- 50% on 10 July
- 30% on 20 August
The cost of this car is $ 70,000, so ABC makes a gross profit of $ 30,000 from this sale. Please prepare journal entry for this installment sale.
On 01 June, ABC has sale the car and deliver it to the customer. Accountant has to record installment receivable $ 100,000 and credit inventory (car) $ 70,000, deferred gross profit $ 30,000.
| Account | Debit | Credit |
|---|---|---|
| Installment Receivable | 100,000 | |
| Inventory | 70,000 | |
| Deferred Gross Profit | 30,000 |
On 07 June, XYZ make payment based on the schedule. So ABC needs to record debit cash of $ 20,000 ($ 100,000 * 20%), and credit installment receivable for the same amount.
| Account | Debit | Credit |
|---|---|---|
| Cash | 20,000 | |
| Installment Receivable | 20,000 |
At the same time, they need to record the revenue and expense base on the payment percentage.
Revenue = $ 100,000 * 20% = $ 20,000
COGS = $ 70,000 * 20% = $ 14,000
Deferred Gross profit = $ 30,000 * 20% = $ 6,000
The journal entry is debiting COGS $ 20,000, debit deferred gross profit $ 6,000, and credit revenue $ 20,000.
| Account | Debit | Credit |
|---|---|---|
| COGS | 14,000 | |
| Deferred Gross Profit | 6,000 | |
| Revenue | 20,000 |
On 10 July, XYZ make another 50% payment based on the schedule. ABC needs to record cash receive $ 50,000 ($ 100,000 * 50%) and credit installment receivable.
| Account | Debit | Credit |
|---|---|---|
| Cash | 50,000 | |
| Installment Receivable | 50,000 |
ABC needs to record additional revenue, COGS, and deferred gross profit for the same percentage.
Revenue = $ 100,000 * 50% = $ 50,000
COGS = $ 70,000 * 50% = $ 35,000
Deferred Gross Profit = $ 30,000 * 50% = $ 15,000
The journal entry is debiting COGS $ 35,000, deferred gross profit $ 15,000 and credit revenue $ 50,000.
| Account | Debit | Credit |
|---|---|---|
| COGS | 35,000 | |
| Deferred Gross Profit | 15,000 | |
| Revenue | 50,000 |
On 20 August, XYZ pay the last 30%. ABC needs to record debit cash of $ 30,000 and credit installment receivable.
| Account | Debit | Credit |
|---|---|---|
| Cash | 30,000 | |
| Installment Receivable | 30,000 |
ABC also record additional revenue, COGS, and deferred gross profit for the same percentage.
Revenue = $ 100,000 * 30% = $ 30,000
COGS = $ 70,000 * 30% = $ 21,000
Deferred Gross Profit = $ 30,000 * 30% = $ 9,000
| Account | Debit | Credit |
|---|---|---|
| COGS | 21,000 | |
| Deferred Gross Profit | 9,000 | |
| Revenue | 30,000 |
In the end, ABC record revenue of $ 100,000 and cost of goods sold $ 70,000. Both accounts will record on the income statement. The difference of $ 30,000 is the gross profit that will be present on the income statement as well. Installment receivable and deferred gross profit will be removed from balance sheet.