5. Installment Method

• Under this method, the revenue is recognized proportionally as cash is collected, rather than at the time of sales. This is often used when there is uncertainty about the buyer’s ability to make payments.

Steps to be followed while using this method:

1. Total estimated cost along with installments paid for each year is given.

2. Calculate estimated profit %:

Estimated profit % = (Cost of the year * 100) / Total Sales

1. Calculate estimated profit:

Estimated profit = Estimated profit % * Cash collected in the year

1. Calculate cost to be recognized: By deducting the estimated profit of the year from the estimated expenditure incurred in that year.

Cost to be recognized = Estimated Expenditure - Estimated profit

Example: A company builds a house for ₹1 crore. The estimated expenditure of building that house is ₹60 lakh, resulting in a profit of ₹40 lakh. The buyer pays the amount as follows:

Solution

Accounting Treatment

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