Revenue recognition for instalment sales

The COVID-19 pandemic has had a dramatic impact on many businesses and the overall economy. As the crisis continues, companies and individuals may increasingly find themselves in the position of needing more liquidity in an environment that does not lend itself to selling off property, luxury goods, or other products in traditional ways. Instalment sales may be an excellent way to attract buyers looking to take advantage of the current environment to purchase if they do not have the means to cover the full purchase price upfront.

Keywords: Mazars, Thailand, Accounting, Revenue recognition, Instalment method, Instalment sales, TFRS for NPAEs, Revenue Department, COVID-19

15 July 2021

An instalment sale is a financing arrangement under which the buyer makes payments in instalments over a certain period of time and receives the goods at the beginning of that period. As a result, revenue and expenses are recognized at the time of cash collection, not at the time of the sale.

Instalment sales can be summarized as follows:

  1. An instalment sale allows the buyer to make payments over an extended period of time.
  2. Revenue and expenses are recognized at the time of cash collection, not at the time of sale.
  3. Ownership is not fully transferred at the point of sale.
  4. There is a degree of uncertainty in the collection of cash.

Instalment method of revenue recognition

The instalment method of revenue recognition involves the gross profit being deferred until the cash from the sale is received. Unlike the cost recovery method, which defers the profit until the cash collected exceeds costs, the instalment method recognizes a proportionate amount of profit upon the receipt of each instalment.

Scenario

On 30 June 2020, Company A, a machinery company, makes a sale for a piece of machinery with a retail price of THB 600,000. The cost to the company is THB 360,000. Therefore, the gross margin for the goods is 40%.

Company A makes an agreement with a customer under which the customer is required to make instalments of THB 50,000 each month for the piece of machinery for 12 months, including 6% interest, until the amount is paid in full, from 31 July 2020 until 30 June 2021.

 

Thai baht

Sale

600,000

Cost of sale

360,000

Gross profit margin

240,000

The amount of revenue recognized upon the receipt of each instalment equals the product of the gross profit rate on the instalment sale and the amount received in instalments, as follows:

Gross profit on sale = 600,000 – 360,000 / 600,000 = 40%

Instalment period

Due date

Interest rate

Opening balance

Instalment amount

Income

Interest

Balance

1

31 July 2020

6%

600,000

50,000

46,934.91

3,065.09

550,0000

2

31 August 2020

6%

 

50,000

47,174.68

2,825.32

500,0000

3

30 September 2020

6%

 

50,000

47,499.24

2,500.76

450,0000

4

31 October 2020

6%

 

50,000

47,658.32

2,341.68

400,0000

5

30 November 2020

6%

 

50,000

47,969.63

2,030.37

350,0000

6

31 December 2020

6%

 

50,000

48,146.83

1,853.17

300,0000

7

31 January 2021

6%

 

50,000

48,392.79

1,607.21

250,0000

8

28 February 2021

6%

 

50,000

48,771.92

1,228.08

200,0000

9

31 March 2021

6%

 

50,000

48,889.15

1,110.85

150,0000

10

30 April 2021

6%

 

50,000

49,166.75

833.25

100,0000

11

31 May 2021

6%

 

50,000

49,390.07

609.93

50,0000

12

30 June 2021

6%

 

50,000

49,653.94

346.06

-

Total

600,000

579,648.25

20,351.75

 

Issue 

How should the Company record transactions related to instalment sales in its financial statements for 2020?

Response

Under the instalment method, both revenue and the associated cost of goods sold are recognized at the time of the initial sale, but gross profit recognition is deferred until cash payments are received. This method requires the accountant to track the gross margin percentage for each reporting period, so the correct percentage can be recognized when the associated cash receipts arrive at a later date.

As a result, instalment sales should be recorded under TFRS for NPAEs as follows:

Date

Description

Debit

Credit

30 June 2020

 

600,000

 
 

Deferred gross profit

 

240,000

 

Inventory

 

360,000

 

Recording the transaction of instalment sales at the time of the sale

       

31 July 2020

Cash at bank

50,000

 
 

Instalment accounts receivable

 

50,000

 

When the Company collects money from the customer

       

31 July 2020

Cost of sales (50,000 x 60%)

30,000

 
 

Deferred gross profit (50,000 x 40%)

20,000

 
 

Instalment sale

 

46,934.91

 

Interest income

 

3,065.09

 

Recording revenue and cost of sales and deferred gross profit

Notes:

  1. The journal posted each month would follow the format above except that the figures would use the figures in the table.
  2. Deferred gross profit is a contra account.
  3. Instalment accounts receivable are recognized as current assets, since the full term of the instalment sale represents the normal operational cycle of Company A.  
  4. Under clause 3.5 of Revenue Department Regulation No. Taw. Paw. 1/2558, the computation of revenue and expenses of a company making instalment sales where ownership of the item sold has not yet been transferred to the purchaser and the term of the contract is more than one accounting period, the company must include profits derived from the sale in the computation of total revenue in the accounting period in which the payment or the instalment sale is due. Any gain derived from instalment sales shall be included as revenue for each instalment, according to generally accepted accounting principles.

References: TFRS for NPAEs and the Revenue Department

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