Installment sale

Definition

An installment sale is a sales transaction where the seller allows the buyer to pay for goods or services in periodic payments, rather than in one lump sum. Revenue and any potential interest are recognized over the period when payments are received.

5 Must Know Facts For Your Next Test

1. Revenue recognition occurs as payments are received, not at the point of sale.
2. Installment sales can include both principal and interest components.
3. The seller needs to account for unearned revenue on their balance sheet until payments are made.
4. Interest income from installment sales must be separately accounted for in financial statements.
5. Installment sales agreements should specify the payment schedule, total amount financed, and interest rate.

Review Questions

• How is revenue recognized in an installment sale?
• What components need to be accounted for in an installment sale agreement?
• Why does an installment sale require separate accounting for interest income?

Related terms

Revenue Recognition:

The principle dictating when revenue should be recorded and reported.

Receivables: Amounts owed to a company by customers who have purchased goods or services on credit.

Unearned Revenue:

Money received by a business for services not yet performed or goods not yet delivered.