Over 2 million + professionals use CFI to learn accounting, financial analysis, modeling and more. Unlock the essentials of corporate finance with our free resources and get an exclusive sneak peek at the first module of each course. Start Free
An installment sale is a financing arrangement in which the seller allows the buyer to make payments over an extended period of time. In an installment sale, the buyer receives the goods at the beginning of the installment period and makes payments over an installment period. Revenue and expense are recognized at the time of cash collection and not at the time of sale.
The installment sales method of revenue recognition defers revenue recognition until cash from the sale is received. Therefore, the installment sales method is a conservative method of revenue recognition as revenue is not immediately recognized at the point of sale.
The installment sales method is only applied in situations where ownership is not fully transferred at the time of sale. In addition, the method is used when there is a degree of uncertainty over the amount that will be collected (therefore, it would be inappropriate to recognize all revenue at the time of sale).
The journal entries for installment sales are as follows:
Company A is a furniture company and makes a sale for a piece of furniture with a retail price of $10,000 at the end of January. The cost of the furniture to the company is $4,000. Therefore, the gross margin for the good is 60%.
The company strikes a deal with the customer in which the customer is required to make installment payments of $2,500 each month for the furniture until the full amount is paid ($10,000).
Installment Sale Method - Sample Data" width="461" height="145" />
Installment Sale Method - Sample Payment Scheme" width="773" height="198" />
The journal entries for Company A would be as follows:
The journal entries for the end of March, April, and May would be the same as the journal entry above.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA) ® certification program for anyone looking to become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
Get Certified for Financial Modeling (FMVA)®Gain in-demand industry knowledge and hands-on practice that will help you stand out from the competition and become a world-class financial analyst.
