How to Calculate the Amount of Realized Gross Profit on Installment Sales

Accountants can only recognize a portion of revenue from an installment sale.

Installment sales for which a company receives the total payment due over the course of more than one payment. Revenue recognition is an important concept to accrual accounting; to recognize revenue, the revenue must be earned or received. Since installment sales take a longer period of time to collect, an accountant will defer some gross revenue to the future collection of the revenue and recognize only a portion of the revenue in the current period.

Instructions

1. Divide the gross profit by the sales on installment to calculate gross profit percentage. For example, a company has an installment sales contract. They have a gross profit of $300,000 with the total sales on installment of $1,000,000. Therefore, the gross profit percentage is $300,000 divided by $1,000,000 for 30 percent.

2. Subtract any remaining accounts receivable from the sales on installment. In the example, the company must still receive $100,000 on the contract, so $1,000,000 minus $100,000 equals $900,000. This is the total amount collected.

3. Multiply the total amount collected by the gross profit percentage to calculate realized gross profit. In the example, $900,000 times 30 percent equals $270,000.

References

• University of Idaho: Chapter 18 - Revenue Recognition
• Ole Miss: Chapter 19 - Revenue Recognition (PDF)