Installment Method

Okay, well...first let’s start with the question, “What’s an installment?”

Well, basically, it’s a way of buying things. Really want those silver-plated golf clubs that are guaranteed to make you play like Tiger (in his heyday)? Well, they cost $1,300. Ouch. Don’t have the dough? Don’t even have the credit to just put the purchase on Amex?

Well, you probably want to get some financial therapy over your spending habits, but if you can get past that, then you can likely buy the clubs by paying in installments.

So you’d pay, say, 100 bucks each month for 13 months, and boom: the clubs are bought and paid for.

Okay, so now let’s think about how this purchase gets accounted for on the books of the guy who just sold you those clubs. Well, in this case, had you simply agreed to pay for the clubs with money payable three months later, it would have shown up on the seller’s books as an account receivable.

In this case, however, you are paying it off for 13 lucky weeks, in which you install your payment in 1/13 segments. So on the books of the seller, as each week goes by, and he collects $100 from you, were this straight Account Receivable, the number would simply decline to $1,200, then to $1,100 and so on.

The key accounting difference here is that, when applying an Accounts Receivable-style tracking system, the revenue is recognized all up front, and the value of the Account Receivable declines in 1/13 parts until it is fully depreciated to zero.

In the installment method, the key difference is that revenues are not recognized until the cash actually shows up in the bank. So really, the two accounting methods are as different as young Tiger and...new Tiger.

Isn’t he eligible for the senior tour yet?