Anonymous
Feb 8
Discuss In Detail with example about : 1.Installment method 2.Cost recovery method 3.Cash collection method?
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Feb 8
1. Installment method:
The installment method is an accounting method used to recognize revenue from the sale of goods or services over a period of time. Under this method, revenue is recognized proportionally as cash is collected from the customer. This method is typically used when the collection of cash from the customer is uncertain or when the payment is spread out over an extended period.
For example, let's say a company sells a product for $10,000 to a customer with the agreement that the customer will pay in four equal installments of $2,500 each over the next four months. Under the installment method, the company would recognize revenue of $2,500 each month as the customer makes the payments. This allows the company to match the revenue recognition with the cash inflows from the customer.
2. Cost recovery method:
The cost recovery method is an accounting method used when the collection of cash from a customer is highly uncertain or when there is significant risk of non-payment. Under this method, revenue is not recognized until the company has recovered all of its costs associated with the sale. Only after the costs have been recovered can any additional cash collected be recognized as revenue.
For example, let's say a company sells a product for $5,000 to a customer, but there is a high risk that the customer may not be able to pay. The company incurs $3,000 in costs to produce and deliver the product. Under the cost recovery method, the company would not recognize any revenue until it has collected at least $3,000 from the customer to cover its costs. Once the $3,000 is collected, any additional cash collected would be recognized as revenue.
3. Cash collection method:
The cash collection method is a simple and straightforward method of revenue recognition. Under this method, revenue is recognized at the time cash is collected from the customer. This method is commonly used when there is a high degree of certainty that the customer will pay and when the payment is received in full at the time of sale.
For example, let's say a company sells a product for $1,000 to a customer and the customer pays in cash at the time of purchase. Under the cash collection method, the company would recognize revenue of $1,000 immediately upon receiving the cash from the customer.
In summary, the installment method is used when revenue is recognized proportionally as cash is collected, the cost recovery method is used when revenue is recognized only after costs have been recovered, and the cash collection method is used when revenue is recognized at the time cash is collected. The choice of method depends on the specific circumstances of the sale and the level of certainty regarding cash collection.
The installment method is an accounting method used to recognize revenue from the sale of goods or services over a period of time. Under this method, revenue is recognized proportionally as cash is collected from the customer. This method is typically used when the collection of cash from the customer is uncertain or when the payment is spread out over an extended period.
For example, let's say a company sells a product for $10,000 to a customer with the agreement that the customer will pay in four equal installments of $2,500 each over the next four months. Under the installment method, the company would recognize revenue of $2,500 each month as the customer makes the payments. This allows the company to match the revenue recognition with the cash inflows from the customer.
2. Cost recovery method:
The cost recovery method is an accounting method used when the collection of cash from a customer is highly uncertain or when there is significant risk of non-payment. Under this method, revenue is not recognized until the company has recovered all of its costs associated with the sale. Only after the costs have been recovered can any additional cash collected be recognized as revenue.
For example, let's say a company sells a product for $5,000 to a customer, but there is a high risk that the customer may not be able to pay. The company incurs $3,000 in costs to produce and deliver the product. Under the cost recovery method, the company would not recognize any revenue until it has collected at least $3,000 from the customer to cover its costs. Once the $3,000 is collected, any additional cash collected would be recognized as revenue.
3. Cash collection method:
The cash collection method is a simple and straightforward method of revenue recognition. Under this method, revenue is recognized at the time cash is collected from the customer. This method is commonly used when there is a high degree of certainty that the customer will pay and when the payment is received in full at the time of sale.
For example, let's say a company sells a product for $1,000 to a customer and the customer pays in cash at the time of purchase. Under the cash collection method, the company would recognize revenue of $1,000 immediately upon receiving the cash from the customer.
In summary, the installment method is used when revenue is recognized proportionally as cash is collected, the cost recovery method is used when revenue is recognized only after costs have been recovered, and the cash collection method is used when revenue is recognized at the time cash is collected. The choice of method depends on the specific circumstances of the sale and the level of certainty regarding cash collection.
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