What is an Installment Sale?

An installment sale approach is one of the many ways revenue is recognized according to the Generally Accepted Accounting Principles (GAAP). In this method, revenue is only recognized when cash is collected by a business and not when sales are made by the business. For instance, it is possible for Company A to sell some products to Customer c without collecting payment for the goods instantly. The installment sale recognizes revenue at the point cash is paid and not when goods are sold. This method encourages the collection of cash for goods sold over an extended period of time. In this method of sale, a buyer must pay for goods purchased at installments or through agreed regular payments.

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How Do Installment Sale Work?

The installment sale help businesses spread their income over a period of time, which offers them certain tax benefits. An installment sale is a method that permits businesses to calculate revenue and expense at the time of cash collection and not at the time of sale. This method is used in different business sectors and industries. In the real estate market, for instance, an installment sale approach allows a home buyer to spread the payment of the house over a period of time, if the payment plan extends to another accounting year, the buyer pays interest on the installment payment.