Installment Method
A revenue recognition approach recording profit proportionally as payments are received for sales with extended payment terms, aligning income recognition with cash collection.
Installment Method
A revenue recognition approach that records profit from a sale proportionally as payments are received over time rather than entirely at the point of sale, particularly used for transactions with extended payment terms and uncertain collectibility.
For instance, if a real estate developer sells a property for $1 million with a $200,000 gross profit and receives $200,000 down payment (20% of the sale price), the installment method would recognize $40,000 in profit at sale (20% of the $200,000 gross profit), with remaining profits recognized as future installments are collected.
The installment method aligns income recognition with cash collection rather than with the transfer of goods or services. Under current GAAP (ASC 606), this method has limited application for financial reporting as revenue is generally recognized when performance obligations are satisfied. However, it remains relevant for tax reporting in certain situations, allowing taxpayers to defer tax payments until cash is collected. The method requires tracking gross profit percentages for each year’s sales separately and maintaining detailed records of outstanding installment receivables.