Installment Method
Categories: Credit
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?
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Finance: What is Installment Method?0 Views
Finance a la shmoop what is an installment method? okay well first let's
start with a question what's an installment? basically it's a
way of buying things really wanted those silver plated golf clubs that guaranteed [Golf ball on a tee and golf club appears]
to make you play like Tiger when he was good you know the young Tiger not the
new whining Tiger who can't break par... well those golf clubs cost thirteen
hundred bucks ouch don't have the dough don't even have the [Man with empty jean pockets]
credit just put it on the Amex well you probably want to get some financial
therapy over your spending habits but if you can get past that well then you can [Man laying on couch in financial therapy]
likely by the clubs by paying in installments
so you'd pay say a hundred bucks each month for thirteen 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 [Balance sheet appears]
in this case have you simply agreed to pay for the clubs with money payable
three months later well it would have shown up on the sellers books as an
account receivable right like he was to receive money from you ninety days later
in this case however you are paying off the clubs for thirteen lucky weeks in [Accounts receivable sheet for installment payments]
which you install your payment in one thirteenth segment one hundred bucks
each right so on the books of the seller as each week goes by he collects his
hundred bucks from you and were this straight accounts receivable the number
would simply decline to twelve hundred dollars and eleven hundred dollars, then a
grand and so on well the key accounting difference here
is that when applying an accounts receivable style tracking system the
revenue is recognized all upfront and the value of the account receivable
declines in one-thirteenth parts until it's fully depreciated to zero. In the
installment method however the key difference is that revenues are not
recognized until the cash actually shows up in the bank of the golf club seller
right so really the two accounting methods are about as different as young [Man discussing accounting methods and young Tiger Woods appears]
Tiger and new Tiger and isn't he eligible for the Senior Tour yet?