Installment Sales refer to a sales method where the buyer pays for the purchased goods or services in a series of payments over time, rather than making a full payment upfront. This approach is often used for large purchases like real estate or vehicles, allowing buyers to manage cash flow more effectively.
In accounting, the seller recognizes revenue and profit on an installment sale as payments are received, rather than at the time of sale. This is especially relevant under the percentage-of-completion method, where the seller can defer recognizing some income until it is collected.
For example, if a company sells machinery for $10,000, with the buyer making a down payment of $2,000 and agreeing to pay the remaining $8,000 in four monthly installments, the seller would record revenue progressively as each installment is received, rather than recognizing the full $10,000 at the sale’s inception.