Accounting For Instalment Payment System

You know that the ownership of goods passes to the buyer immediately on the signing of the contract. Hence, while accounting for the purchase under the Instalment payment system, this fact should be taken into account. Accordingly, the buyer credits the vendor with the full amount payable to him (inclusive of total interest) and debits the assets with cash price and the Interest Suspense Account with the total amount of interest being the difference between the full amount payable and the cash price. 

The Interest Suspense Account is credited with the actual amount of interest at the time of each instalment by transferring the same to Interest Account. Similarly, the vendor debits the buyer with the full amount and credit sale with cash price and Interest Suspense Account with total interest. He transfers the actual amount of interest to Interest Account at the time of each instalment by debiting Interest Suspense Account and crediting the Interest Account.

Thus, from accounting point of view, the main point of difference between Instalment Payment System and the Hire Purchase System relates to the treatment of interest. But in practice, even this may be dispensed with.

The asset account is maintained by the buyer in a manner similar to that of Hire Purchase System i.e., depreciation is charged in the usual manner and the depreciated value of the asset is shown in the Balance Sheet. It should be noted that the balance in Vendor’s Account shall be shown on the liability side every year.

Let us now study the journal entries both in the books of the buyer and seller under Instalment Payment System.


Books of the Buyer

The buyer passes the following journal entries in his books.

i) When the Asset is purchased

Asset A/c                         Dr.                     (with cash price)

Interest Suspense A/c     Dr.                     (difference between cash price

To Vendor (with Instalment price)      and instalment)


ii) For cash down payment

Vendor A/c                       Dr

To Bank A/c


iii) For interest due at the time of instalment

Interest A/c                      Dr.

To Interest Suspense A/c


iv) For the payment of instalment

Vendor A/c                       Dr

To Bank A/c


v) For Depreciation at the end of the accounting year

Deprecation A/c              Dr.

To Asset A/c


vi) For transfer of interest and depreciation to Profit & Loss A/c

Profit & Loss A/c          Dr.

To Interest A/c

To Depreciation A/c

After passing the above mentioned journal entries, the purchaser prepares the following ledger accounts.

i) Asset A/c

ii) Vendor’s A/c

iii) Interest Suspense Account

iv) Interest Account


Books of the Vendor

The vendor passes the following journal entries when the goods are sold on instalment payment system.

i) When the goods are sold

Purchaser                             Dr.                      (with total price)

To Sales A/c                            (with cash price)

To Interest Suspense A/c       (with the difference between the total price and cash price)


ii) For cash received as down payment

Bank A/c                            Dr.

To Purchaser A/c


iii) For interest due on instalment

Interest Suspense A/c       Dr.

To Interest A/c


iv) For receipt of the amount of instalment

BankA/c                              Dr.

To Purchaser A/c


v) For transfer of interest to Profit & Loss A/c

Interest A/c                         Dr.

To Profit & Loss A/c


Like the buyer, the vendor also prepares certain Ledger accounts. They are

i) Buyer’s Account

ii) Interest Suspense Account

iii) Interest Account

Mayank Rai

Hi, My name is Mayank Rai. I found that Blogging is an easiest way to share your knowledge with everyone & learn something new from there. facebook whatsapp telegram

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