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Finance: What is Installment Method? 0 Views


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What is an installment method? And how many times can we trash talk Tiger Woods in one video? Hit play to find out.

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Transcript

00:00

Finance a la shmoop what is an installment method? okay well first let's

00:08

start with a question what's an installment? basically it's a

00:12

way of buying things really wanted those silver plated golf clubs that guaranteed [Golf ball on a tee and golf club appears]

00:18

to make you play like Tiger when he was good you know the young Tiger not the

00:22

new whining Tiger who can't break par... well those golf clubs cost thirteen

00:26

hundred bucks ouch don't have the dough don't even have the [Man with empty jean pockets]

00:29

credit just put it on the Amex well you probably want to get some financial

00:34

therapy over your spending habits but if you can get past that well then you can [Man laying on couch in financial therapy]

00:39

likely by the clubs by paying in installments

00:43

so you'd pay say a hundred bucks each month for thirteen months and boom the

00:47

clubs are bought and paid for okay so now let's think about how this purchase

00:51

gets accounted for on the books of the guy who just sold you those clubs well [Balance sheet appears]

00:56

in this case have you simply agreed to pay for the clubs with money payable

01:00

three months later well it would have shown up on the sellers books as an

01:04

account receivable right like he was to receive money from you ninety days later

01:08

in this case however you are paying off the clubs for thirteen lucky weeks in [Accounts receivable sheet for installment payments]

01:14

which you install your payment in one thirteenth segment one hundred bucks

01:20

each right so on the books of the seller as each week goes by he collects his

01:23

hundred bucks from you and were this straight accounts receivable the number

01:28

would simply decline to twelve hundred dollars and eleven hundred dollars, then a

01:32

grand and so on well the key accounting difference here

01:34

is that when applying an accounts receivable style tracking system the

01:38

revenue is recognized all upfront and the value of the account receivable

01:43

declines in one-thirteenth parts until it's fully depreciated to zero. In the

01:48

installment method however the key difference is that revenues are not

01:53

recognized until the cash actually shows up in the bank of the golf club seller

01:58

right so really the two accounting methods are about as different as young [Man discussing accounting methods and young Tiger Woods appears]

02:02

Tiger and new Tiger and isn't he eligible for the Senior Tour yet?

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