What is the correct procedure for recording negative equity in an installment sale agreement?

In the context of an installment sale agreement, it is essential to account for negative equity correctly as it reflects the financial situation of the buyer. Negative equity occurs when the amount owed on the current financing exceeds the value of the asset being financed.

Choosing to deduct the cash down amount from negative equity is the appropriate procedure. This is because when entering into an installment sale agreement, any down payment made by the buyer can offset the overall negative equity position. By applying the cash down payment to the outstanding negative equity balance, it reduces the amount that the buyer still owes, thereby offering a clearer picture of their financial obligation moving forward.

This approach allows for a more accurate representation of the buyer's equity position in the asset and facilitates better financial planning. It ensures that both the seller and buyer account for the monetary contributions made towards reducing the negative equity effectively.