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Presentation On:Accounting For Installment Sales:

Presented By :

Syeda Nida & Ramsha Sidiqui

Teacher : Sir IrfanDate : 31/March/2015

AL-MUNAWAR COMMERCE ACADEMY

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ACCOUNTING FOR INSTALLMENT SALES :

Introduction :

It is a postponed payment executed in a fixed number of installment at a determinant time with a price higher than cash price.

AL-MUNAWAR COMMERCE ACADEMY

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TYPES OF PROPERTYPERSONAL PROPERTY REAL PROPERTY*For personal use

For exampleIf you purchase car for

personal use , it is your personal property.

*For business use

For exampleIf you purchase car for

sale , it is your real property.

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PERIOD OF INSTALLMENT AGREEMENT

*FOR PERSONAL PROPERTY

*FOR REAL PROPERTY

UP TO

YEARS

UP TO

YEARS

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PROTECTION FOR THE SELLER

1) Transfer Of Title To Trustee

2) Transfer Of Title With Property Subject To Lien Or Mortgage

3) Conditional Sales Contract

4) Lease Purchase Arrangement

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METHOD TO REDUCE REPOSSESSION LOSSES

1)Down Payment Should Be Large Enough .

2)Installment Period Shouldn’t Be Too Long .

3)Installment Payment Should Exceed The Decline In The Value Of The Article That Takes Place B/W Payments .

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METHOD OF GROSS PROFIT RECOGNITION ON SALE

Two general approaches may be taken to the recognition of gross profit on sales:

1)Gross Profit Recognition In The Period Of Sale.

2)Gross Profit Related To The Periods In Which Cash Is Collected.

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1-GROSS PROFIT RECOGNIZE IN THE PERIOD OF SALE

Using perpetual method

Sell merchandise for Rs.600 having cost Rs.500 in 20xx

Sales………………….600

Less:Cost of good sold….(500)GROSS PROFIT……….100

Sales & cost of good sold close at the end of year to realize the whole profit in the period of sale (20xx) .

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X . Y . Z coGeneral Journal

DATE DESCRIPTION PR

DEBIT CREDIT

2… Account receivable 600

sales 600

2… Cost of good sold 500

Merchandise inventory 500

2… sales 600

cost of good sold 500

Income summary 100

2… Income summary 100

capital 100

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2- GROSS PROFIT RECOGNIZE THE PERIOD IN WHICH CASH IS COLLECTED

1)Collection Regarded As First The Recovery Of Cost.2)Collection Regarded As First The Realization Of Profit.3)Collection Regarded As Both Return Of Cost And

Realization Of Profit.METHOD (3) above, providing for the recognition of G.P ,is referred to as accounting by the installment method or installment basis. )

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THE INSTALLMENT METHOD

Using perpetual methodSell merchandise of Rs.600 of

cost Rs.500 on installment basis in 20xx.

Installment sales…………....600

LESS:Cost of installment sales....(500) UNREALIZE GROSS PROFIT ………………. 100

GROSS PROFIT RATE % :

=Un realize G.P x 100 Installment sales = 100 x 100 600 = 16.6666%

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X.Y.Z CoGeneral JOURNAL

DATE DESCRIPTION PR DEBIT CREDIT

2… Installment A/R 600

Installment sales 600

2… Cost of installment sales 500

Merchandise Inventory 500

2… Installment sales 600

cost of installment sales 500

Un realize Gross profit 100

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REALIZATION OF GROSS PROFIT WITH COLLECTION OF CASH

*Installment account receivable collected Rs.100

X . Y . Z CoGeneral Journal

REALIZE GROSS PROFIT :Collection of installment account receivable……….. Rs.100 Realize G.P= collection x G.P % = 100 x 16.666 % = 17

DATE DESCRIPTION P.R

Dr. Cr.

2… Cash 100

Installment A/R 100

2… Un realize G.P 17

Realize G.P 17

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IN CASE OF REPOSSESSION OF MERCHANDISE

If the customer default by remaining Installment A/R Rs.500 & fair market value of merchandise reposed is Rs.300

CALCULATION :Value assigned (market value)………. …..…… ………

Rs.300 LESS: Cost of merchandise repossess :- Installment A/R cancelled ………… ….. 500 Un realize G.P 500 x 16.666% ……… ….. (83) … ….(417) LOSS ON REPOSSESSION …......................................117

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X . Y . Z CoGeneral Journal

ENTRY OF REPOSSESSION .

Date DESCRIPTION P.R DEBIT CREDIT

2… Merchandise repossessed 300

Un realize G.P 83

Loss on repossession 117

Installment A/R 500

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Interest On Installment Basis:

There are two methods of recording of interest on unpaid balance of installment account receivable :

1- ON ACCRUAL BASIS 2- ON CASH BASIS

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ENTRIES1-ON ACCRUAL BASIS

2-ON CASH BASIS

DATE

DESCRIPTION P.R

Dr. Cr.

xx Interest receivable xxx

Interest revenue xxx

XX

cash xxx

Interest receivable xxx

DATE

DESCRIPTION Dr. Cr.

XX CASH xx

Interest revenue xx

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THANK YOU

Prepared by:

Ramsha & Nida