What is Accounting for installment system?

Accounting for installment system

Concept

An installmentsystem is a credit system of purchase and sale of goods in which payments or receipts are made in installment basis over a period of time. In this system, certain amount is paid as down payment amount at the time of signing the agreement. The remaining amount can be paid in different periodical installments such as monthly, their monthly, half yearly or annually over a period of time. In this system, the purchase gets both possession as well as ownership rights of the goods at the time of signing the contact. If to purchaser fails to pay any installment, the vendor cannot reposes the goods and the amount already paid in installment by the purchases are not forfeiture. In this case, the vendor can sue the purchaser for recovery of balance amount.

Feature of installment system

The following are the main features of installment system:

• It is a system of credit purchase and sale of assets or goods on credit.
• The purchaser should pay down payment at the time of signing the agreement.
• The ownership of goods or assets is immediately transferred to buyer seller at the time of agreement.
• The purchaser receives the rights to use of assets immediately after the signing of agreement.
• The buyer makes payments in different installments over a period of time as per agreement.
• The seller cannot repose the goods, if the buyer fails to pay installment.
• In case of default of any installment, the total amount of installment already paid by the buyer cannot be forfeited by the seller.
• Legal procedures should be followed by the seller to collect the amount of remaining installments in the case of defaulting the installments.
• Risks over the assets are automatically transferred to the buyer just after agreement.
• The purchase cannot return the assets to the seller after signing the agreement under this system.

Difference between hire Purchase andInstallment System

The difference between hire purchase and installment system are explained in the following points:

Calculation of interest, cash price and installment using analytical Table

Accounting Treatment in the Books of Vendorand Buyer for installment

After calculating interest, cash price, and installment as per hire purchase system, the following journal entries are made in the books of purchaser:

After passing the above mentioned journal entries in the books of purchase, the following necessary ledger account can be prepared:

·         Assets account

·         Interest suspense account

·         Vender account

·         Interest account

·         Depreciation account

The following journal entries are made in the books of vendor in the case of installment system:

After passing thee above mentioned journal entries in the books of vender, the following necessary ledger accounts can be prepared:

• Purchase account
• Sales account
• Interest suspense account
• Interest account
• Depreciation account

Review of Theoretical Concept

Write the meaning of installment payment system.

 An installment system is a credit system of purchase and sale of goods in which payments or receipts are made in installment basis over a period of time in this system, certain amount is paid as down payment amount at the time of signing the agreement. The remaining amount can be paid in different periodical installments such as monthly, three monthly, quarterly, half yearly or annually over a period of time, in this system or annually over a period of time, the purchase gets both possession as well as ownership rights of the goods at the time of signing the contact if the purchaser fails to pay any installment, the vendor cannot reposes the goods and the amount already paid in installment by the purchaser are not forfeiture, in this case, the vendor can sue the purchaser for recovery of balance amount.

Explain any five feature of installment payment system.

The following are the main five features of installment system:

• It is a system of credit purchase and sale of assets or goods on credit.
• The purchaser should pay down payment at the time of signing the agreement.
• The ownership of goods or assets is immediately transferred to buyer seller at the time of agreement.
• The purchaser receives the rights to use of assets immediately after the signing of agreement.
• The buyer makes payments in different installments over a period of time as per agreement.