“Cash Methods” LT Contract Revenue Recognition

Installment Sales
Use if you have no clue WHEN you will get money. You will only record revenue only if CASH is actually collected.

- Cannot establish reasonable bad debt %

Calculation:

1. Gross Profit = Sales – (Cost)
2. Gross Profit % = GP / Sales Earned
3. Revenue (per year) = Cash Collections*GP %
4. Installment Receivable = Sales – (Collections) – (Written Off Sales)
5. Deferred Revenue = Installment Receivable*GP %

Cost Recovery Method (most conservative)
Use if you have no clue that you will actually GET money. You don’t recognize profit until all COST has been recovered.

After you received the money that will fully cover your cost, then the money that comes in after can be recognized as profit.

Calculation:

1. Keep applying collected cash to cost.
2. The remaining collected will be gross profit.

Journal Entry for Both Method
Debit: Deferred Gross Profit
Credit: Realized Gross Profit