Meaning of Installment Payment System
An installment payment system is a method of paying for goods or services in which the total cost is divided into smaller, regular payments over a defined period of time. Instead of paying the entire amount upfront, the purchaser agrees to make payments at scheduled intervals until the total amount owed is fully paid off. These intervals could be weekly, bi-weekly, monthly, or according to another agreed-upon schedule.
Instalment Payment system is one of the method of credit sale and purchase. Under this system, purchase price is paid by the buyer in installment and become the owner on the date of entering into agreement
Installment payment systems are commonly used in various contexts, including:
- Retail: Many retailers offer installment payment options to customers, allowing them to purchase products and pay for them over time. This can make expensive items more affordable for consumers.
- Financing: Installment payment plans are often used for financing purchases such as cars, furniture, appliances, or electronics. Customers can spread out the cost of these big-ticket items over several months or years.
- Loans: Personal loans and consumer loans often involve installment payments. Borrowers repay the loan amount plus interest in fixed installments over the loan term.
- Subscription Services: Some subscription-based services may offer installment payment options for annual or longer-term subscriptions, allowing customers to spread the cost over smaller payments.
Installment payment systems provide benefits for both buyers and sellers. Buyers can afford purchases that might otherwise be too expensive upfront, while sellers can increase sales by offering flexible payment options. However, it’s important for both parties to understand the terms of the installment plan, including any interest or fees associated with it.
An installment payment system, often spelled as “instalment” in some regions, is a method of paying for goods or services in which the total cost is divided into smaller, regular payments over a defined period of time. Instead of paying the entire amount upfront, the purchaser agrees to make payments at scheduled intervals until the total amount owed is fully paid off. These intervals could be weekly, bi-weekly, monthly, or according to another agreed-upon schedule.
Difference between Hire-Purchase System and Installment Payment System
The term “hire-purchase system” refers to a specific type of installment payment system that is commonly used for purchasing expensive items such as cars, furniture, or appliances. In a hire-purchase arrangement, the buyer takes possession of the item immediately but does not own it until all payments have been made. The buyer pays an initial deposit, followed by a series of installment payments over a fixed term. Once all payments have been made, ownership of the item is transferred to the buyer.
Here are some key differences between a hire-purchase system and a general installment payment system:
- Ownership: In a hire-purchase system, the buyer does not own the item until all payments have been made. Ownership is transferred only after the final installment payment. In a general installment payment system, ownership may or may not be tied to the payment schedule. For example, with some retail installment plans, the buyer owns the item from the beginning but pays for it in installments.
- Legal Framework: Hire-purchase agreements often have specific legal requirements and protections, depending on the jurisdiction. These may include regulations governing the content of the agreement, the rights and responsibilities of both parties, and procedures for repossession in case of default. General installment payment systems may not have the same level of legal regulation and may vary widely in terms of terms and conditions.
- Purpose: Hire-purchase systems are commonly used for purchasing high-value items such as vehicles or large appliances, where spreading the cost over time makes the purchase more affordable for the buyer. General installment payment systems can be used for a wide range of purchases, from small consumer goods to larger investments.
In summary, while both hire-purchase systems and general installment payment systems involve paying for goods or services over time, hire-purchase agreements are a specific type of installment plan with distinct characteristics, particularly regarding ownership and legal frameworks.
Journal Entries in for Installment Payment System
- Interest calculation table is prepared in the same way as it is prepared under hire purchase system.
- Difference with installment system- Buyer debit; asset account with full cash price, credit; vendor account with full installment price and debit; interest suspense account with the difference in full cash rice and full installment price.
- Interest is debited to interest suspense account (not interest account) because it includes interest in respect of a number of years. Every year interest account is debited and interest suspense account is credited with the interest of current year.
Journal Entries in the books of Purchaser(Buyer)
| Date | Particulars | L.F. | Dr. Amount | Cr. Amount |
| At the time of Agreement | ||||
|
Asset A/c (Total Cash Price) Dr. Interest Suspense A/c (Total Interest) Dr. |
—
— |
|||
| To Vendor’s A/c | — | |||
| (Being asset purchased on instalment system) | ||||
| When down payment is paid | ||||
| Vendor’s A/c Dr. | — | |||
| To Cash or Bank A/c | — | |||
| (Being down payment paid) | ||||
|
At the end of each year When Interest becomes due |
||||
| Interest A/c (Interest of the asset in the installment) Dr. | — | |||
| To Interest Suspense A/c | — | |||
| (Being transfer of interest falling due) | ||||
| For the payment of Instalment | ||||
| Vendor’s A/c (Total installment) Dr. | — | |||
| To Cash or Bank A/c | — | |||
| (Being installment paid) | ||||
| When depreciation is charged | ||||
| Depreciation A/c (Calculated on Cash Price) Dr. | — | |||
| To Asset A/c | — | |||
| (Being depreciation charged) | ||||
| For transfer of Interest & Depreciation | ||||
| Profit and Loss A/c Dr. | — | |||
| To Interest A/c (Interest of the asset in the installment) | — | |||
| To Depreciation A/c (Depreciation Charged) | — | |||
| (Being interest and depreciation transfer to profit and loss a/c) | ||||
*Red Text is for understanding which will help you to solve the numerical.
#last four journal entries will be repeatedly used on every installment or based on numerical.
Journal Entries in the books of Vendor (Seller)
| Date | Particulars | L.F. | Dr. Amount | Cr. Amount |
| When goods are sold under Hire Purchase | ||||
| Purchaser’s A/c Dr. | — | |||
|
To Sales A/c To Interest Suspense A/c |
— — |
|||
| (Being goods sold on instalment system) | ||||
| When down payment is received | ||||
| Cash or Bank A/c Dr. | — | |||
| To Purchaser’s A/c | — | |||
| (Being down payment received) | ||||
| When the interest of the installment becomes due | ||||
| Interest Suspense A/c Dr. | — | |||
| To Interest A/c (Interest of the asset in the installment) | — | |||
| (Being interest of the installment due) | ||||
| When Installment is received | ||||
| Cash or Bank A/c (Total installment) Dr. | — | |||
| To Hire Purchaser’s A/c | — | |||
| (Being installment amount received) | ||||
| For transfer of Interest | ||||
|
Interest A/c (Interest of the asset in the installment) Dr. To Profit and Loss A/c |
— |
— |
||
| (Being interest transfer to profit and loss a/c) | ||||
|
For transfer of Sale to Trading A/c Sales A/c Dr. To Trading A/c (Being Sales transfer to trading a/c) |
— |
— |
*Red Text is for understanding which will help you to solve the numerical.
# Interest due, instalment paid and interest transfer to P & L A/c journal entries will be repeatedly used on every installment or based on numerical.
Scenarios of Questions
| Installment | Rate of Interest | Cash Price | |
| I | Given | Given | Given |
| II | Given | Given | Not Given |
| III | Given | Not Given | Given |
Other Scenarios
| When interest is included in the installment | When interest is not included in the installment |
| When the down payment and all the installments total is exceeds then the cash price | When the down payment and all the installments total is equal to the cash price. |
| Example: | Example: |
| Cash Price: ₹ 1,00,000 | Cash Price: ₹ 1,00,000 |
| Down Payment: ₹ 25,000 | Down Payment: ₹ 20,000 |
| Four Installment ₹ 25,000 each : Total 1,00,000 | Four Installment ₹ 20,000 each : Total 80,000 |
| Here the total is ₹ 1,25,000 which is exceeds then Cash Price | Here the total is ₹ 1,00,000 which is equal to Cash Price |
| ₹ 1,25,000 (Total Amount) — ₹ 1,00,000 (Cash Price) = ₹ 25,000 (Interest) | ₹ 1,00,000 (Total Amount) = ₹ 1,00,000 (Cash Price) |
Analysis Table for Calculation of Interest and Cash Price
| Date and Year | Cash Price Balances after each installment | Cash Price | Interest | Total Amount (Hire Purchase Price) |
| Total | Nil | — | — | — |