Business thinking for years about alluring ways to promote their sales and their management and encourage customers to purchase to facilitate a payment and reached installment sale method found the revitalization of commercial traffic and gentle to their products after successive waves of price increases, which have given the buyer the opportunity to get up and enjoy the advantage of paying the price in instalments does not feel their burden.
Although the installment sale method has spread
Initially in the area of real estate and high-priced durable goods but has spread in recent years to sell many products bakodalbia installment and the number of people engaged in this type of activity and the number of its clients to benefit from the necessary briefing this kind of deal with the ingredients that make it lead to, the buyer gets to need concessional debt collection trader guarantees on time so as not to trading to orgasms may adversely affect a credit score.
And when selling by installments we may face some difficult problems among accountants and the corresponding problems between costs and revenue and the questions raised in this respect: do you recognize the profit resulting from the sale by installments in the accounting period in which the sale? Or distribute profit over the time period of the contract of sale? And what is the method to be followed in dealing with costs that occur in subsequent periods of the sales process? Then what is the proper accounting procedures in the case of the buyer’s insolvency, failure to pay, and if you wish to replace the goods sold and finally if you restore the seller the goods sold by buyer and cancel the sales contract?
Despite the accounting problems that have arisen from the sale by installments, but we can say that this method will remain one of the basic features of the modern economy and the accountants to examine these issues and adopt more effective accounting methods of measurement as a result of selling by installments and control and report them, and no doubt the sale installment one of many theoretical issues facing accountants and they are building an integrated and coherent conceptual framework of accounting principles, so I blog the first accountant in This initial post I will try to describe the accounting system for enterprises that sell installment sale contracts and design constraints and books and accounts which are commensurate with the nature of these contracts and extract the result of profits and losses.
Characteristics of installment sale contracts
Installment sale is one of the manifestations of contemporary economic life and this method has spread to many types of goods, used to increase the size of the production and marketing of the goods could not be achieved under a cash sale or sale to account for, and the holding of installment sale agreement between buyer and seller whereby the goods ownership I to II to use for payment of a specific number of equal periodic installments, each installment is paid by buyer as a reimbursement for part Of the sales price agreed.
Given that the financial situation of customers that purchase installment be weaker than those who buy in cash or fixed add to potential credit rating change to those customers and reduced ability to pay markedly during the period of validity of the contract of sale, installment credit losses and the risk of non-collection is growing significantly in case of installment sale.
And to avoid the risk of non-installment sellers collect owed them, opted for a kind of contracts applies to “a contract for the sale of Tajiri” to the terms of the recovery of the goods sold if the buyer to pay the premiums due, if the seller recovered the goods for the buyer’s failure to pay the premiums payable by the buyer is not entitled to claim any part of what would be paid from previous installments due to judge assess the damage if the buyer stops payment due to force majeure.
Usually there is a lack of the value of goods sold due to use or technological limitations or other factors that make the value of this commodity at a certain date is less than the balance of the premium so the installment sale contract that seller on a cash payment “as submitted” to cover losses in the value of goods sold, and the logical rule in this regard that less cash instalment submitted by the buyer for the projected decline in the value of the goods sold, for example if I buy one Individual car installment and then one year later discovered that current market value less the balance of instalments due then will drop has incentive to continue paying premiums.
To avoid this type of vendor risks they usually resort to obtain a cash payment by more than just add to the amount of the premium or premiums received in the first year from the projected reduction in the current value of the vehicle sold.
As a result of the above, I can say that the price of the sale by installments is the total amount of the premiums, the buyer shall pay in addition to submitted price any installment sale price = the total amount of premiums + submitted price (1) and is known as the cash sales price consists of two main elements:
1. cost and price to the seller for the cost of buying a product or the cost of manufacture.
2. amount of profit and reflects a certain percentage of profit considered the project back for its investments and therefore:
Selling price = cost price + cash profit (2)
On the other hand, because the seller waits for a period of time so that he can collect the sales price, the contract of sale by installments typically involves downloading the buyer interest on the unpaid portion of the sales price agreed annual monetary weimadl this interest as compensation for the lost opportunity to the seller as a result of abandoning the goods and collect its value gradually periodic instalments and interest is calculated on the basis of simple or composite, compound interest is used in practice.
As a result, the price of the sale by installments consists of cash sales price plus other benefits which are accounted for on the balance of the cash price when payment of each installment to installment sale price = sales price cash + other benefits (3)
It is based on the we (1, 3) the biennium:
The total amount of premiums + submitted price = sales price cash + other benefits (4)
Calculation of premiums and benefits of selling by installments
I have already indicated that in sales by instalments has been agreed that the purchaser of the interest on the unpaid portion of the sales price and cash when the buyer to pay the balance of the cash sales price plus other benefits equal periodic installments.
Since profit is the increase in the price of sale cash price of the goods sold, the cost benefits of installment sale shall not be deemed a part of the overall profit and is some sort of revenue go to the credit side of the profit and loss account, on the other hand, the benefits achieved in part through successive time periods based on premiums collected already so they leave to the profit for each period so as to benefit each of the benefits premiums collected during this session.
The following calculation of premiums and benefits in case of agreement on cash payment in advance and pay the rest of the periodic instalments of equal price and utility vehicles as the most common case used in practice, on the one hand, and on the understanding that both the buyer and seller agree on the sales price and the cash price we can from equation (4) concluded the following:
Cash sales price. price = the total amount of premiums-inter, on the other hand, given that both the installment and number of installments and interest rate are the subject of an agreement between the seller and the buyer we can through a normal batch value loan conclusion periodic premium amount, and therefore determine the amount of the periodic payment to beat the others paid from the cash sale price (selling price-price provider) in Figure derived from table to find the value of regular loan payment under Commissions and the installment.
It must be noted that the annual interest on the outstanding balance of cash sales price decrease annually because of declining balance by the payment of each instalment, should note that the refund of the cash sales price is increasing because of the steadily decreasing annuity amount annual interest.
The foregoing indicated that agreement on the date that the profits realized from the sale by installments, installments may extend to several years which requires that the profits of each financial cycle so that the project is located in a dividend has not yet been achieved due to the collection of all premiums.
Specify profit selling by installments
Accounting terms accounting President objective to address sales installment in trying to determine the timing of recognition of profit and verification established in books and on the idea that the profits from the overall profit during the accounting period is that you go to the credit side of the final accounts in order to access the net accounting profit.
The process of defining loader profit selling by installments is a complex problem because of the difficulty to identify profit and the artwork of costs and expenses in the accounting period in which the sale process, there are significant expenses that may occur in the following accounting periods as collection and accounting expenses and recover the goods from the buyer if payment add stops to repair this commodity expenses and in many cases may be the risk of the buyers stopped high to a large degree, Question the possibility of recognizing check travellers at the time of sale.
Accordingly we find that the first accounting is that reasonable interview between costs and revenue due to varying circumstances in the business community, views differed on the recognition achieved profit on those operations, accountants from this link finds profit accrual basis and are considered linking cash basis while others link to a cost-recovery basis and the following I will try to discuss these views, so the image clearly :
A-accrual basis
The accrual basis of accounting to make profit is most commonly used in practice and completed according to this basis cycle check the profit with the completion of the sale and delivery of the goods to the buyer, at this point in time profitably be President event project has achieved leading to achieve that profit at the same time the availability of substantive evidence of a reciprocal process to measure value of this profit or $.
Accrual basis in line with the principles and assumptions and basic concepts of accounting standard, in particular in terms of objectivity and the relative importance and applicability and reservation, as a fact of sale as a reality distinct and clear, specific and measurable objective that the restrictions make profit at the moment of sale is a concrete and then the overall profit achieved sales of installment in increasing the sales price of the cash price of the cost of the product and in this case the following are everyday constraints :
* ** My installment sales
* ** To hire sales
And when you follow the project for ongoing inventory method it should convert the cost of goods sold inventory account to calculate the cost of installment sales and the following limitation:
* Cost of installment sales
*** To inventory
In the area of accounting for sales on credit, the criticism directed to the accrual basis of accounting is to ignore the seller’s right to recover the goods sold and to ignore relatively much of the uncertainty of the collectability of all premiums with no reasonable basis for risk assessment of the non-collectability (bad debts) add to ignore expenses the following accounting periods.
B. cost recovery basis
In accounting for selling installment can say that profit can be achieved only after the fact of recovery of cost of goods sold for that at this point in time the project has completed the major events of the achieved profit (sale and delivery, availability of substantive evidence to measure the real value of profit), and under this basis is not an overall gain hire sales had been achieved only after recovery of cost of goods sold first and any amounts collected from buyers after recovering all costs recorded as profit total any investigator The overall profit achieved was last repayments amounts collected.
This is consistent with the generally accepted accounting standards, particularly in terms of objectivity and infantile importance and applicability and reservation however criticized the use of a cost-recovery basis in projects sale installment because it gives a distorted picture of the ability of project profitability and financial position, so that the overall current accounting period profit will come from cash sales and installment sales for that period or previous periods as long as the final installments were collected during this period, on the other hand recognizes a retrieve Only the cost of running expenses for the accounting period profit and ignores the many items of expenses incurred project over consecutive accounting periods after the sale and delivery for this reason, it is rare to use a cost-recovery basis in life and practice.
C-cash basis
Installment sale projects are usually a collection of large premiums nsbias add to the lack of a reasonable basis for estimating the risks resulting from the inability to obtain in such cases represent cash collection point and not point of sale and event delivery President in turn make profit of it at this point in time the degree of uncertainty surrounding this profit has been reduced to a reasonable level, and under that basis deferred recognition of profits until the collection worth in cash and it The overall gain hire sales achieved cash receipts for premiums during the period of the sales contract that each portion of the project is collecting premiums worth in cash the amount of this installment includes part of cost of goods sold and part of the overall profit achieved as a result of collection as well as a certain amount of interest.
And also consistent with the generally accepted accounting standards in terms of objectivity and the relative importance and applicability and reservation and is the Foundation on which is being used in practice by the installment sale projects and justify its use in such projects, the length of time needed to collect the premiums and risk execution in addition to debt collection and customer service expenses incurred in subsequent periods for the sale and delivery which justify delay recognition of achieved profits until the collection.
From the above I find that the three grounds in accordance with generally accepted accounting standards I find that each considerations, basically I rely on continuing optimism to collect all premiums and exclude the possibility of losses while the second basis depends on continuing pessimism not collect all premiums and put the potential losses.
The third basis between both former extremists so no need for extreme optimism or pessimism Ultra, so that when the financial policy and the design of the accounting system of installment sale most preferred accountants including the first accountant in cash basis to address their profits because of this basis, the overall profit is not complete just the first installment and collection does not delay it until the last installment collection.
The sale of installment Installment Sale
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