Installment Sales Method

When any product or good is sold on installment basis, it will not be normal sale. We will not apply accrual method of accounting on this type of sales because we collect cash from this sale in installment. So, we will apply installment sales method for showing total earning in our income statement instead of showing total installment sales in income statement.


Steps of applying installment sales method

1. To calculate total installment sales. 

Installment sales of 2011

$1,200,000

2. To calculate cost on installment sales.

Cost on installment goods sold of 2011

$840,000

3. To calculate the difference between 1 and 2. It will be the gross profit. 

Deferred Gross profit

1,200,000 - 840,000 = $360,000

4. To calculate the gross profit rate by dividing this gross profit with installment sales. 

Gross profit percentage

360,000/ 1,200,000 X 100= 30%

5. To calculate total cash collected in one year from installment sales. 

On 2011, cash collected from  installment sales

$300,000

6. To calculate its gross profit and show in income statement. 

Revenue from Installment Sales for Income Statement

$300,000 X 30% = $ 90,000