Definition Installment Sales Method. Description
The Installment Sales Method is one of several Revenue Recognition approaches under U.S. GAAP, in which revenue is recognized subsequently to the sale, at the time of cash collection.
One instance in which revenue recognition might be delayed beyond the point of sale is when sales are made under very extended payment terms (e.g. installment sales of consumer durables and retail land sales of vacation or retirement property).
As a lengthy collection period significantly increases the risk of non-collection and in general does not provide a reasonable basis for estimating the proportion of installment accounts likely to prove uncollectible, neither of the two revenue recognition conditions under U.S. GAAP are satisfied and the recognition of revenue should be deferred.
The Installment Sales Method recognizes income based on the Gross Profit Percentage (gross profit/sales) and the amount of cash collected. For example, if a company collected 35% of the total sales amount, it can recognize 35% of the gross profit. The remaining 65% of gross profit are deferred until cash is collected.
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