Journal entry for Installment Sale

An installment sale is a sale in which the buyer pays for the purchase in periodic payments. The payments can be made over a period of months or years, and they usually include interest.

Installment sales are often used for large purchases, such as cars, furniture, and homes They can also be used for smaller items, such as appliances and jewelry. For sellers, installment sales can be a good way to increase sales by making it easier for buyers to afford expensive items. They can also generate interest income on the unpaid balance.

For buyers, installment sales can make it easier to purchase items that they may not be able to afford at the moment. The buyers are not required to pay a huge cash flow when purchasing the items. However, it is important to remember that you will ultimately pay more for the item due to interest charges. As always, it is important to carefully consider the terms of any installment sale before making a purchase.

The installment sale is one of the most popular financing options for big-ticket items. It allows the customer to spread the cost of the purchase over time, while the company still receives the full purchase price upfront.

This type of sale can be especially beneficial during slow periods, when customers may be reluctant to make a large purchase all at once. By offering an installment plan, the company can increase sales and generate revenue that would otherwise be lost.

In addition, customers who take advantage of an installment sale are often more likely to be satisfied with their purchase and become repeat buyers. For these reasons, an installment sale is an effective tool for any business looking to increase sales and revenue.

When a company sells a product, it records the sale revenue on its financial statements. The amount of revenue that is recorded represents the total value of the products or services that were sold. Sale revenue is one of the most important measures of a company’s financial performance. It is used to assess whether a company is generating enough sales to cover its costs and generate profit. Sale revenue is also an important input into other financial calculations, such as gross margin and net income. For these reasons, it is essential for companies to accurately record their sales revenue.

Journal Entry for Installment Sale

When providing installment sales to customers, the seller is highly likely to retain ownership over the items such as cars or homes. The seller only allows the buyer to use the items but they have no right to sell. It will prevent the buyer from selling these items and stop paying the installment.

If the buyer is not able to fulfill the installment payment, they will be forced to return the property back to the seller.

In accounting, the seller will not able to record revenue at the time of sale. It is due to the ownership not yet transferred and the risk of the customer defaulting on the installment.

The seller requires to recognize the revenue base on the cash collection. The cost of goods sold is also recorded based on the percentage of cash collected as well.

At the point of sale, the company will record receivables and decrease inventory and deferred gross profit. The journal entry is debiting installment receivable and credit inventory, deferred gross profit.

Account Debit Credit
Installment Receivable 000
Inventory 000
Deferred Gross Profit 000

Installment receivable is the amount that company needs to collect from the buyer over the installment period. It is recorded as the assets on balance sheet.

The deferred gross profit is the difference between inventory cost and sale amount (installment receivable). It does not yet impact the income statement but is recorded as the liability on the balance sheet.

When the customer makes a payment, the company needs to record cash received and reverse receivable as normal.

The journal entry is debiting cash and credit installment receivable.

Account Debit Credit
Cash 000
Installment Receivable 000

In addition, the company needs to record sales, and cost of goods sold and reverse the deferred gross profit.

The journal entry is debiting deferred gross profit, cost of goods sold, and credit sale revenue.

Account Debit Credit
Deferred Gross Profit 000
COGS 000
Sale Revenue 000

The sale revenue record depends on the cash installment collected from the buyer. The deferred gross profit depends on the percentage of gross profit over sales.


ABC is a car company that provides installment sales to customers. On 01 August, company sells a car to a customer for $ 200,000 while its cost is $ 150,000. The customer requires to pay an installment of $ 20,000 per month for 10 months. Please prepare journal entry for the installment sale.

ABC sell car on installment, we need to calculate the gross profit.

Gross profit = sale – cost of goods sold = $ 200,000 – $ 150,000 = $ 50,000

Gross profit is 25% ($50,000/$200,000) of total sale. The COGS is 75% of the total sale.

On 01 August, the company needs to make journal entry of debiting installment receivable $ 200,000 and credit inventory $ 150,000, Deferred Gross Profit $ 50,000.

Account Debit Credit
Installment Receivable 200,000
Inventory 150,000
Deferred Gross Profit 50,000

It will increase the installment receivable $ 200,000 as the current asset on the balance sheet. Inventory is removed from the balance sheet while the deferred gross profit will increase $ 50,000 as a current liability.

On 31 August, the customer make a payment of $ 20,000.

First, ABC need to record debit cash $ 20,000 and credit installment receivable $20,000.

Account Debit Credit
Cash 20,000
Installment Receivable 20,000

Second, it needs to debit deferred gross profit $ 5,000, COGS $ 15,000 and credit sale revenue $ 20,000.

Account Debit Credit
Deferred Gross Profit 5,000
COGS 15,000
Sale Revenue 20000

Deferred Gross Profit $ 5,000 = $ 20,000 * 25%

COGS $ 15,000 = $ 20,000 * 75%