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What is an installment sale?

An installment sale is a type of revenue recognition adopted by sellers where they allow the buyer to pay in installments over a specified period without transferring the full interest at the time of sale.

This method enables the seller or supplier to recognize revenue and expenses during cash collection rather than at the time of sale. Partial deferral of any capital gains to future tax years is done using the installment approach.

The installment sale method requires buyers to make payments as agreed and pay interest if payments are made in consecutive tax years.

How do installment sales work?

Installment selling helps businesses spread their income over some time, providing them with certain tax advantages. Installment selling is a method that allows businesses to account for revenue and expenses at the time of cash collection rather than at the time of sale.

This method is used in different business sectors and industries. In the real estate market, for example, the installment sale approach allows the home buyer to spread the home payments over some time. If the payment plan extends into another accounting year, the buyer pays interest in the installment payment.