Forms of Sales Methods of Gross Profit Recognition

1 Regular Sales
1.1 Cash Sales Gross Profit is recognized at time of sale
1.2 Charge Sales Gross Profit is recognized at time of sale
2 Installment Sales
(a) Gross Profit is recognized at time of sale
A/R is debited & Sales is credited at time of sale
Expenses incurred at time of sale is recorded on the same date
Expenses incurred after the sale are estimated and liability is recorded at time of sale
(b) Gross Profit is recognized in the period in which
CASH IS COLLECTED
The amount of cash collections becomes the basis of gross profit recognition
COST RECOVERY METHOD
Gross Profit is recognized until Collections = Cost of Goods Sold
GROSS PROFIT REALIZATION METHOD
First collections are regarded as realization of gross profit
After recognition of full profit, all subsequent collections are treated
as recovery of cost
INSTALLMENT SALES METHOD
Cash collection is regarded as a partial recovery of cost & a partial
realization of profit in the same proportion that these
two elements are present in the original selling price'
s recorded at time of sale

profit recognition

ns = Cost of Goods Sold

on of gross profit
quent collections are treated

ecovery of cost & a partial

e proportion that these
e original selling price'
INSTALLMENT SALES METHOD
Accounting Procedures
a. Installment Sales is recorded in the normal manner
b. Gross profit on the sale is deferred through a credit
to a deferred gross profit account
c. Deferred gross profit is adjusted for any realized
gross profit as installment payments
are received
REALIZED GROSS PROFIT
Gross Profit Rate x Collection of Sale
d. Deferred gross profit is presented in the statement of
financial position as NONCURRENT
LIABILITIES
e. Directly related operating expenses incurred in making the
sale are to be deferred
f. Not directly related operating expenses are not deferred
BASIC TYPES OF PROPERTY SOLD ON INSTALLMENT BASIS
1 Installment Sales of conventional merchandise
2 Installment Sales of real estate
a. By a non-dealer
b. By a dealer
 Sales 100,000.00 100% 20,000.00 80,000.00
COS 60,000.00 60% 2,000.00
Gross Profit 40,000.00 40% 40.00

INSTALLMENT SALES METHOD

Gross Profit 40,000.00
Collections Realized Deferred
9.00 CY 2016 38,000.00 15,200.00 24,800.00
12.00 CY 2017 24,000.00 9,600.00 15,200.00
12.00 CY 2018 24,000.00 9,600.00 5,600.00
7.00 CY 2019 14,000.00 5,600.00 -
100,000.00 40,000.00
Sales 60,000.00 100%
COS 42,000.00 70%
GP 18,000.00 30%

Receivable 60,000.00 1.00

DP 20,000.00 0.97
Installments 40,000.00 0.94
0.92
7,383.90 5.41719 40,000.00 0.89
0.86
0.84
5.41719
 3%
Total Interest Principal Gross Profit Realized Gross Deferred
Date
Collection Collection Collection Rate Profit Gross Profit
6/30/2016
6/30/2016 20,000.00 - 20,000.00 30% 6,000.00 12,000.00
7/31/2016 7,383.90 1,200.00 6,183.90 30% 1,855.17 10,144.83
8/30/2016 7,383.90 1,014.48 6,369.42 30% 1,910.83 8,234.00
9/30/2016 7,383.90 823.40 6,560.50 30% 1,968.15 6,265.86
10/31/2016 7,383.90 626.59 6,757.31 30% 2,027.19 4,238.66
11/30/2016 7,383.90 423.87 6,960.03 30% 2,088.01 2,150.65
12/31/2016 7,383.90 215.07 7,168.83 30% 2,150.65 -
64,303.40 4,303.40 60,000.00 18,000.00
Outstanding
Principal Sales 60,000.00
60,000.00 COS 42,000.00
40,000.00 GP 18,000.00 0.30
33,816.10
27,446.68 Cash 20,000.00
20,886.18 Installment CR, 2016 40,000.00
14,128.87 Installment Sales 60,000.00
7,168.83
- Cash 7,383.90
Installment CR, 2016 6,183.90
Interest Income 1,200.00
 0.12
1.00
2016 10,000.00 0.89286 8,928.57 5 2 10
2017 10,000.00 0.79719 7,971.94 5 3 15
2018 10,000.00 0.71178 7,117.80 5 4 20
2019 10,000.00 0.63552 6,355.18 45
2020 10,000.00 0.56743 5,674.27
2021 10,000.00 0.50663 5,066.31 5 9 45
2022 10,000.00 0.45235 4,523.49
2023 10,000.00 0.40388 4,038.83
2024 10,000.00 0.36061 3,606.10
2025 10,000.00 0.32197 3,219.73
100,000.00 56,502.23

10,000.00 5.6502 56,502.23

10,000.00 5.65 56,502.23
CY 2015
Accounts Receivable 250,000.00 Sales 100,000.00
Sales 250,000.00 COS 60,000.00
GP 40,000.00
Cash 20,000.00 40%
Installment Contracts Receivable, 2015 80,000.00
Installment Sales 100,000.00

Cost of Sales 120,000.00

Cost of Installment Sales 60,000.00
Merchandise Inventory 180,000.00

Cash 120,000.00
Accounts Receivable 120,000.00

Cash 45,000.00
Installment Contracts Receivable, 2015 19,000.00
Interest Income 26,000.00

Operating Expenses 50,000.00

Cash 50,000.00

Interest Receivable 1,800.00

Interest Income 1,800.00

Installment Sales 100,000.00

Cost of Installment Sales 60,000.00
Deferred Gross Profit, 2015 40,000.00

Deferred Gross Profit, 2015 15,600.00

Realized Gross Profit 15,600.00

CLOSING ENTRIES:

Realized Gross Profit 15,600.00

Income Summary 15,600.00

Sales 250,000.00
Interest Income 27,800.00
Cost of Sales 120,000.00
Operating Expenses 50,000.00
Income Summary 107,800.00
Income Summary 123,400.00
Retained Earnings 123,400.00
39,000.00

15,600.00
CY 2016

Interest Income 1,800.00

Interest Receivable 1,800.00

Accounts Receivable 230,000.00

Sales 230,000.00

Cash 24,000.00
Installment Contracts Receivable, 2016 96,000.00
Installment Sales 120,000.00

Cost of Sales 130,400.00

Cost of Installment Sales 69,600.00
Merchandise Inventory 200,000.00

Cash 130,500.00
Accounts Receivable 130,500.00

Cash 97,000.00
Installment Contracts Receivable, 2015 26,000.00
Installment Contracts Receivable, 2016 22,000.00
Interest Income 49,000.00

Operating Expenses 65,000.00

Cash 65,000.00

Interest Receivable 3,270.00

Interest Income 3,270.00

Installment Sales 120,000.00 Sales 120,000.00

Cost of Installment Sales 69,600.00 COS 69,600.00
Deferred Gross Profit, 2016 50,400.00 GP 50,400.00

Deferred Gross Profit, 2015 10,400.00

Deferred Gross Profit, 2016 19,320.00
Realized Gross Profit 29,720.00

CLOSING ENTRIES:

Realized Gross Profit 29,720.00

Income Summary 29,720.00
Sales 230,000.00
Interest Income 50,470.00
Cost of Sales 130,400.00
Operating Expenses 65,000.00
Income Summary 85,070.00

Income Summary 114,790.00

Retained Earnings 114,790.00
 46,000.00

0.42 19,320.00

26,000.00

40%
10,400.00