Installment purchase system

An installment system is just like a credit purchase and hire purchase system of selling and buying goods. Like hire purchase, in installment system an agreement is made between buyer and seller to purchase and sell of goods. The buyer makes certain down payment at the time of signing agreement and the balance is paying in installment over a period of time.
An installment system is a credit sale in which payments are made in installments over a period of time. In this system, the buyer gets the possession as well as ownership of the goods right at the time of signing the agreement. During the course of paying the installment, if the buyer makes default in paying the installment, the vendor cannot responses the goods. In that case, the vendor can sue the buyer for recovery of dues. Like in hire purchase even the paid installments also can not be forfeited in case of default in paying installment.
Thus, it can be said that installment system is a kind of credit sale where installments are entertained over the period and default in such payment cannot responses the goods and in that case, the vendor can only sue the buyer for the recovery of amount due.

Features Of Installment Purchase System

1. Installment purchase system is just like an outright credit sale of goods.

2. The buyer makes the payment in different installment over a period of time as agrees upon in the agreement.

3. Under installment purchase system, the buyer gets the immediate possession as well as the ownership of goods.
4. The seller can not responses the good if the buyer made default in the payment of installment but he/she can sue against the buyer for the recovery of amount due.

5. In case of default in the payment of installment, the total amount of installments already paid by the buyer can not be forfeited.

6. Under installment system, the buyer can sell or mortgage the goods even before clearing all the installments.

7. Risk of goods/assets are to be borne by the buyer just after signing the agreement.

8. The buyer of the goods under installment purchase system has no right to return the goods to the seller.

There are two methods of recording transactions under Installment System. These are:

1. With Opening Interest Suspense Account
2. Without Opening Interest Suspense Account

Journal entries under these two methods are as under:

Journal entries in the books of purchaser

1. For purchasing goods under installment system:

First Method

Assets A/C(total cash value)…………..Dr.

Interest suspense A/C(total interest)………Dr.

To vendor A/C

Second Method

Assets A/C (total cash value)…………Dr.

To vendor A/c

2. For payment of cash down value (both method)

Vendor A/C………………Dr.

To Bank A/C

3. For interest due

First Method

Interest A/C…………..Dr.

To Interest suspense A/C

Second method

Interest A/C……………Dr.

To vendor A/C

4. For payment of installment (both methods)

Vendor A/c………….Dr.

To bank A/C

5. For depreciation charges (both methods)

Depreciation A/C………….Dr.

To Asset A/C

6. For transferring interest and depreciation