The installment method is used when collection of payments (in excess of the downpayment) extends over several years and is uncertain. It offers a saving from income tax postponement. Depending on the contract, the seller or the buyer has title to the goods.
- A gross profit percentage is determined on the entire contract by subtracting the cost of goods sold from the sale price, and dividing by the sale price.
- Each year the gross profit recognized is calculated by multiplying the amount collected by the gross profit percentage.