WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Free Tutorials
  • Certification Courses
  • 250+ Courses All In One Bundle
  • Login
Home » Accounting Tutorials » Accounting Fundamentals » Advance Payment

Advance Payment

Advance Payment Meaning

Advance Payment is a payment that is made by a buyer to the seller before the actual scheduled time of receiving the goods and services. It protects the seller from the risk of non-payment that could happen in the future. Additionally, it can help the seller financially in the production or procurement of the goods or rendering of services. It appears on the assets side of the balance sheet as a prepaid expense for the buyer. Such advances are usually required when a buyer had defaulted payments in the past, so it protects the sellers from such unforeseen events.

How to Account for Advance Payment?

For Buyer: A buyer making an advance to the seller shall record the transaction by debiting the seller account and crediting the cash or bank account. We show the debit balance of the seller account as a current asset in the books of accounts of the buyer until the goods or services are received, and the invoice issued.

For Seller: To account for an advance, the seller needs to debit cash or bank account and credit the buyer account with the same amount. The credit balance of the buyer account increases current liabilities. Once the customer receives the required goods or services, the seller or institution has to send an invoice to the customer. The invoice contains the total amount owed after subtracting it. Once completing all this procedure, the institution or seller has to record the following transactions in the books of accounts:

  • Revenue is credited
  • Accounts receivable is debited
  • The customer or buyer account is debited.

Advance Payment 1

Examples

‘Prepaid cellphones’ is an example of an advance payment. The customer has to make payment for the prepaid cellphone in advance to enjoy the benefit of it for a month. The service provider provides service for one month only when it receives the prepayments. Likewise, ‘Prepaid rent’ or ‘utilities’ are other such examples.

Popular Course in this category
Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)
4.9 (1,067 ratings)
250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
View Course

The other important example is the U.S ‘taxpayers’ receiving advance payments from the premium tax credit (PTC). It helps the citizens in household activities and for other purposes. The due money of the taxpayer is paid to the insurance company in advance.

Advance Payment in Businesses

Companies that are involved in the manufacturing process need payment in advance as it will show commitment from the buyer’s side that they are willing to purchase and will buy it in the future. It protects the business from unforeseen losses. It also shows the trust of the buyer for the seller as many of these advance payments are nonrefundable.

It provides capital to the seller for the construction of the required goods or services. And it saves the seller from using their wealth or taking a loan for the making of the product.

Advance Payment Guarantee

Prepayments protect the sellers from unforeseen losses, but it is a bad deal for buyers as it poses a risk for them. If the seller is unable to deliver the goods on time, buyers could be in a difficult position. For this purpose, an advance payment guarantee serves buyers as insurance by protecting them from such a situation. According to this, if a seller somehow can’t deliver the goods on time, then the institution or the seller has to refund all the prepayment to buyers. Buyers can consider the deal as void if the seller is unable to deliver.

Importance

  • Protection to the Seller: Advance payment protects the seller from the buyer with a bad credit score and nonpayment.
  • Provides Financial Assistance: Provides financial assistance to the seller in making the goods.
  • Trust Builds Up: Trust is the most critical and difficult thing in the business to earn, and when a buyer makes a prepayment even for the non-refundable deals the trust between the buyer and the seller grows.
  • Guarantee to the Buyer: The guarantee assures the buyer that if the seller is unable to stay on its words, then the seller will refund the prepayments into the account of the customer.

Risks with Advance Payment

One of the most significant risks with the advance payment is for customers. They may get into trouble if the seller fails to fulfil the deal. It might be challenging for buyers to get their money back once the company they had invested in is declared to be bankrupt. That’s the main reason most of the buyers prefer to make payment only when they get what they wanted.

Recommended Articles

This article has been a guide to Advance Payment and its meaning. Here we discuss its accounting along with examples for advance payment along with its example, importance and special considerations. You may learn more about financing from the following articles –

  • Prepayment Penalty
  • Advance Refunding
  • Notes Receivable
  • Types of Credit
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Free Accounting Course

You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!

* Please provide your correct email id. Login details for this Free course will be emailed to you

New Year Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More