Final answer:
Deferred gross profit on installment sales is generally treated as a current liability. It represents revenue that has been recognized but not yet collected, and it is classified as a liability because the company is obligated to deliver the products or services to the customer over time.
Step-by-step explanation:
Deferred gross profit on installment sales is generally treated as a current liability. It represents revenue that has been recognized but not yet collected, and it is classified as a liability because the company is obligated to deliver the products or services to the customer over time.
For example, let's say a company sells a product on an installment basis, where the customer pays for the product in multiple installments over a period of time. When the company sells the product, it recognizes the revenue for the full amount of the product, but only a portion of the total profit is realized at that time. The remaining profit is deferred and recognized as the customer makes the installment payments.
The deferred gross profit on installment sales is reported on the balance sheet as a current liability under the heading of 'Deferred Revenue' or 'Unearned Revenue'. It is eventually recognized as revenue on the income statement as the installment payments are received.