Final Answer:
Deferred gross profit on installment sales is generally treated as a(n) unearned revenue and classified as a current liability.
Step-by-step explanation:
Deferred gross profit on installment sales represents revenue that has been recognized but not yet earned. This amount is considered unearned revenue and is classified as a current liability on the balance sheet. The rationale behind this treatment is that the profit has not been fully realized because the related goods or services are still pending delivery or completion.
Treating deferred gross profit as unearned revenue aligns with the accrual accounting principle, where revenue is recognized when it is earned, not necessarily when the cash is received. In installment sales, even though a portion of the profit is recognized upon sale, the remaining profit is deferred until the buyer fulfills their obligation by completing the installment payments.
By classifying it as a current liability, the company acknowledges its obligation to fulfill the remaining deliverables or services associated with the sale. This accounting treatment provides a more accurate representation of the company's financial position, reflecting both earned and unearned portions of the revenue from installment sales.