The accounting treatment for the installment sales system is the gross profit method

Accounting treatment of the installment sales system, gross profit method In principle, we must know that revenue is a very important element of the income statement, on the basis of which critical decisions are taken by the parties concerned with the company, because the revenue number that appears in the income list, especially the revenue resulting from the main activity of the company It shows how the administration was efficient in utilizing the available resources and capabilities in the best use, and it also measures the extent and for the accounting problems resulting from the admission of sales revenue in installments. We would like to devote an independent article to it explaining the methods of dealing with and applying them in the warehouse management program, the ability of the company to pay its obligations in the long term,

What is the installment sales system in companies?

A successful accountant must know that we admit  revenue on the basis of accounting accrual, meaning that the lesson is not the monetary collection of the value of the revenue, but the lesson is that the revenue will be specific to the year or not ?! So when we sell the goods on credit, we record the transaction with this entry:

From account / clients

               To account / sales

This means that I actually admit   sales revenue even though I did not get it. But the bond is the one that deserves the revenue because I sold it

Why do companies turn to sales installment?

We find that the companies turn to the sales installment in order to activate the sales process more, and we find that this system will be more prevalent in the companies that trade in household and electrical appliances and car showrooms, because the value of the product in them is relatively large, and we find that in two ways the international accounting standards mentioned them for the purpose of using them. In dealing with the process of selling by installments, accounting.

The first method: its name is Installment Sales Method, and we call it (gross profit method)

Through this method, the income resulting from the sale process is admitted in every period in which the cash actually takes place, not just by sale, as I admit the total profit of each installment from the installments due, and of course this is a complex statement that we will understand through this practical application

We assume that Al-Amal Company follows the continuous inventory system and sells electrical devices in installments and at the beginning of the year sold devices to customers an amount of 90,000 pounds (and the cost of this equipment was 54,000 pounds according to the applied cost policy) and the terms of sale were based on the fact that the customer pays an advance payment of 20,000 and the rest is paid by installments in 3 installments And over a period of 3 years

15000 first installment, 25000c second installment, 30,000c third installment.

We want to know the accounting treatment for the sales process in installments that was made if the company follows the gross profit method

First: Determining the percentage of gross profit

We determine the percentage of the gross profit through the simple calculation: (90000-54000) / 90000 = 40%

And with each installment he gets, the gross profit is fixed, through the accounting entries that we will see:

When I get the down payment

Of those mentioned

  20,000 cache

70,000 retail sales customers  

                                           90,000 to the account / sales

And this restriction means that I got from the customer an amount of 20,000 pounds, and owed him 70,000 pounds

And of course the cost of the goods that followed this is fixed through this entry

54,000 of / cost of goods sold

54,000 to account / stock.

Unless we agreed, we are here to follow the continuous inventory system, so it is necessary to make an account for the stock and accounts for the cost of the goods sold.

Second: Accounting closing entry

She was friendly at the end of the year when I came to do the locking shackles on my own

90,000 of the account / installment sales

To those mentioned

54,000 accounts / cost of goods sold

36,000 accounts / total deferred profit

Here I closed the sales account in installments (his cell owed) so that its balance appears at zero because I do not revive here. I admit the sales revenue of 90000 pounds and follow the method of sales in installments that require me to admit to the profit of the amount collected only, and the total of this deferred profit, which represents 40% of the sales as a profit that I recognize in the review of the budget and all A year by reducing the portion by the amount of the premium received.

Third: The percentage of gross profit from the down payment

We calculate the total profit of the advance payment that I obtained and confirm it with this entry

8,000 of deferred profit account / gross (20,000 * 40%)

8000 to the realized profit account / journal.

The amount of the total realized profit is what is admitted in the income statement as a separate item, in the name of total realized profit from installment sales at an amount of 8000 EGP, and the account of the total deferred profit appears in the balance sheet.

And in the second year

Or when the first installment occurs, we repeat the same last two entries with different numbers.

First

15,000 account / cache

15000 to the account / sales customers in installments

And I acknowledge the total profit of the installment that I got through this entry

From deferred profit account / gross

To / the total profit realized

And like what we agreed with the total profit achieved, where does it go?

It appears in the income statement as a separate item

Ok, so where does the deferred profit go?

It appears in the budget review as a commitment

And we repeat the same two entries with the second and third installments

In the next article, we will discuss the installment sales process using the second method To find out the prices of the best accounts program in Egypt and the Middle East from the Accflex system, ask for a price immediately