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Installment vs Rent to Own Accounting

Installment vs Rent to Own Accounting

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Installment vs Rent to Own Accounting

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This is a simplified explanation of the differences between accounting for installment vs rent to own transactions. Below will illustrate a sample transaction for each and how the revenue and expenses are booked. This is in no way legal or accounting advice only a simple illustration about the differences. Always contact a licensed professional attorney or accountant for legal and accounting advice.

 

 

 

Rent to Own details

$600.00 cost of inventory rented

$1500.00 total contract amount / $100 a month for 15 months

 

$50.00 down payment + tax

$3.50 tax

 

The day of the sale your accounting records would be booked as follows (please note the "Cost of Rental", depreciation does not actually show up in your accounting the day of the transaction, it would be part of your total depreciation figure you book monthly):

Income

$50.00

Sales Tax Payable

$3.50

Cost of rental(1 month)

$33.00 (based on 3 year MACRS depreciation HY convention and new item rented in June) Depreciation does not actually show up in your accounting the day of the transaction, it would be part of your total depreciation figure you book monthly.



Gross Profit

$17.00



Deposit to bank acct

$53.50

Accounts Receivable

$0.00

 

So you can see you only pay taxes when you collect them, only count revenue when you collect it. This month for this transaction you would show a profit of $17.00 (and therefore have to pay income/corporate taxes on the $17.00 minus other business expenses).

 

 

 

Installment sale details

$600.00 cost of inventory sold

$1000.00 Sale

$500.00 total precomputed interest

$70.00 sales tax

$50.00 down payment

 

 

The day of the sale your accounting records would be booked as follows:

Income

$1500.00

Sales Tax Payable

$70.00

Cost of Sale

$600.00



Gross Profit

$900.00



Deposit to bank acct

$50.00

Accounts Receivable

$1520.00

 

So you can see even though you only have $50 to deposit you have to pay $70.00 to the state for sales taxes and show a profit of $900.00 (and therefore have to pay income/corporate taxes on the $900.00 minus other business expenses).

 

 

 

 

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