AFAR: A Fastrack of Instalment Sales

Revenue Recognition: Instalment Sales & Revenue from Contracts with Customers


Related Terms:

Revenue- (PAS 18) gross inflow of economic benefits during the period.
-arises in the course of the ordinary-including sales, fees, interest, dividends, royalties, and rent

Gain- represent increases in economic benefit and such are no different in nature from revenue.

Ordinary Activities- core business operations
Revenue is realized when goods and services are exchanged for cash or claims to cash (receivables).

"Revenue is earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenue."

Regular Sales- either cash sales or credit sales.

Installment Sales payment of periodic installment.

Method of Gross Profit Recognition

Time of Sale/ Sale Basis (Accrual Basis)- profit is recognized in the period in which the sale is made.
Time of Collection- profit is recognized in the period in which cash is collected. The gross profit is deferred, then it is realized when collections are made.

Methods of Gross Profit Recognition : AFAR: A Fastrack of Instalment Sales

·         The installment sales method of accounting normally implies the deferral gross profit but the recognition of selling and administrative expenses in the period of their incurred.

·         "The theory that costs and expense should be matched against sales is applied in installment sales transactions through the gross profit figure but no further."

·         Allocation of Cost of Goods Sold

Use lump-sum is usually used for many cases.
· NRV= Estimated Selling Price-Recondition + cost to sell)

    Guidelines in Repossession

        1. Repossession may also be recorded as an estimated cash purchase.

        2.  When published prices are not available, NRV less normal profit may be used.

Journal Entry:    

Repossessed Merchandise        xx
      Deferred Gross Profit                    xx

Loss on Repossession                xx
      Installment Accounts Receivable              xx

Loss/Gain on Repossession: AFAR: A Fastrack of Instalment Sales

·         When a perpetual inventory system is maintained, the account repossessed merchandise should be debited to Merchandise Inventory-Repossessed

  Trade-in- is recorded at the value allowed.

Over-allowance- a reduction in sales price

Trade-In Over Allowance : AFAR: A Fastrack of Instalment Sales


    Uncollectible Allowance__Accounts Written-off    

   Doubtful Acct. Expense                   xx
   Deferred Gross Profit                    XX
       Installment A/R                           xx

·         Interest on Instalment Sales Contracts

a.  Long-end interest- interest is computed based on the balance of the unpaid principal balance between installment period

b.  Short-end interest- interest is computed on the installment due, from the date the contract was entered into until the date of the installment payment.
·         Computation of Realized Gross Profit
  Current Year Sales: Gross Profit/ Instalment Sales
  Prior year’s Sales: Deferred-Gross Profit-Beg. Of Current Year/Instalment A/R-beginning of the current year
·         No matter how it is displayed in financial statements, deferred gross profit on installment sales is conceptually the valuation of an asset, that is, a reduction of assets.
·         The real estate acquired shall be considered as the company’s inventory and are recorded in the same manner as a sale of merchandise.

PFRS 15: AFAR: A Fastrack of Instalment Sales

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