Installment sales accounting and the cost recovery method in the sales cycle

To begin with an example , there is an entry of a sale of one million pounds after completion of the sales cycle . This entry affects the income as a revenue and increases the earnings with one million pounds from the client’s account  into the sales account .

But what if the sale is an installment sale over 3 years ? 

Installment sales accounting treatment 

First , you didn’t actually receive the whole sum ( one million pounds ) , though you have to pay their taxes . Then you will face a liquidity problem . 

Second  , there is no liquidity meanwhile you should pay the earnings  of the owners or shareholders .

Here emerges the problem of installment sales accounting 

According to accounting standards , there is more than one method to avoid and treat this problem as follows :

1- Cost recovery method .

2 - Gross profits method .

Applying cost recovery method in general accounting software 

 In this method there is no recognized profit related to the sale until the  collected installments  exceed the cost of the good or service sold . consequently  this method defers the tax amount that is due till the sales costs are fully received . 

Journal entries of installment sales accounting 

( A )

Recording the sales process and gross accrued value 

So I can say that I sold to my clients in  installments 

 (B )

Record of the cost of goods sold 

So far it looks like any ordinary sale process

( c ) 

At the end of the year I coles the accounts of sales cost and the sale cycle to get a zero in their balances 

Installment collections entry :

Each installment is recorded as 

It is better to repeat this entry for every installment  until the cost is recovered then the sales profits are entered as 

This is applied for each installment till the process ends 

The item of realized gross profits is listed in the income statement as a free item after gross profits .

How to avoid the risk in installment sales 

Installment sales decisions must be based on a perfect and accurate analysis of the client’s credit ability considering his previous deals . Therefore we designed an integrated system of installment sales . It includes a set of important data and accounting instructions that are activated automatically on approving the process , beginning with the entry of  the first accrued payment and recognizing the revenue and ending with the last payment then closing the account .

Using warehouse software in accounting treatment 

Warehouse software treats and directs the installment sales accounting using the two common methods which are the installment sales method ( gross profits ) that recognizes the profits on each realized payment and the cost recovery method (no recognizes  profit until the collected installments exceed the cost of the goods sold )

 Warehouse software  works integratively with the general accounting software and treasury software on a unified database . 

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