CMA PART 1 | Financial Planning Performance and Analytics | Revenue Recognition
Channel: LetsLearn Global
Date: 2024-03-01

Revenue recognition from installment sales

Overview of Installment Sales Method:
o The installment sales method is a conservative approach to recognizing revenue. It defers revenue recognition until cash from the sale is received.
o Unlike other methods where revenue is recognized immediately at the point of sale, the installment sales method waits until the buyer makes installment payments over an extended period.
o This method is typically used when ownership is not fully transferred at the time of sale or when there is uncertainty in cash collection.
How It Works:
o In an installment sale:
 The buyer receives the goods or services at the beginning of the installment period.
 Payments are made by the buyer over time.
 Revenue and expense are recognized only when cash is collected, not at the time of sale.
o It’s commonly applied to situations where the buyer pays in installments rather than upfront.
Journal Entries for Installment Sales:
o Let’s illustrate this with an example:
 Company A, a furniture company, sells 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, resulting in a gross margin of 60%.
 The customer agrees to make monthly installment payments of $2,500 until the full amount is paid.
o The journal entries for Company A would be as follows:
 End of January:
 Accounts Receivable (Asset) increases by $2,500.
 Sales Revenue (Revenue) increases by $2,500.
 The journal entries for the end of March, April, and May would be the same as the entry above.

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