Accounting for an advance or advance

In the life of a company, relations with suppliers and customers have a preponderant part. For best accountancy training Best school of accountancy In Pakistan. Also, it is common for a company to be led to receive or pay down payment or advance , hence the importance of knowing how to account for them.

An advance and a deposit, what is it?

Before starting a service or starting a production, it is common for a company to ask its client for an advance or a down payment . However, there is a real difference between the two terms.

An advance is actually a sum of money paid before an order is even executed . Generally, it allows a company or a craftsman to finance the acquisition of the materials necessary for the delivery without having to "draw" in its caisses.

The deposit is a sum of money paid as the advancement of a benefit according to a schedule previously defined most often.

To be complete, note that it is not necessary to confuse down payment or advance and deferred revenues , the latter corresponding to billings of the whole of a service before their realization.

The accounting entry of a down payment or an advance

Because payment or receipt of an advance or an advance are very specific operations, they involve very specific accounting entries.

Thus, the recording of the payment of an advance / advance is done in 4 steps :

- The recording of the payment of the advance / advance involves debiting the account "4091 Suppliers - Advances and Advances Paid" and crediting the "512 Bank" account

- Accounting for the final invoice requires debiting the account of charges concerned and the account "4456 VAT deductible " (no VAT for a deposit relating to a supply of goods) and crediting the account "4011 Suppliers"

- The transfer of the deposit / advance into the "401" account consists of debiting the account "4011 Suppliers" and crediting the account "4091 Suppliers - Advances and advances paid"

- The balance of the accounts payable with the passage of a writing debiting account "4011 Suppliers" and crediting account "512 Bank".

Receipt of an advance / advance must be processed symmetrically in accounting from the "4191 Clients - Advances and Advances Received" account.