Advance Received Journal Entry

In business, a cash advance is the amount of cash that a company receives from customers as an advance payment. This can be in the form of a down payment on goods or services.

There are many reasons why a company might request a cash advance from a customer. If a company is expecting a large amount of orders, it may ask for an advance payment to cover the cost of purchased items.

Alternatively, if a company is facing financial difficulties, it may ask for payment to secure the purchase from the supplier.

Company receives advance payment from the customer, it has to record it as a liability. The purpose of this paper is to give you a brief introduction to when company receives advance payment from customers and how it should be treated in accounting.

This guidance is relevant if your entity sells goods or services and receives upfront payments before it provides the goods or services. When a customer pays a deposit for goods that will be supplied at a later date. Generally, amounts received as ‘advance payments should be recognized as a liability rather than as revenue.

This is because the seller still has an obligation to provide the service or deliver the goods, even though it has been paid in advance by the customer. Once the service has been provided or the goods have been delivered, then the liability can be recognized as revenue.

Journal Entry for Advanced Received

The company receives the cash from the customer but does not yet provide service or goods to them, so they cannot record it as revenue yet. The revenue is recorded when the goods or services are delivered and it is not related to the cash flow.

The company needs to record the advance received as the liability on the balance sheet.

The journal entry is debiting cash received and credit customer deposit.

The cash balance will increase to reflect the amount received from customer. The customer deposit is the liability account that reflects the company’s obligation to deliver goods or services in the future.

Example

Company ABC has received an advance amount $ 420,000 from the customer for a big purchase from oversea. The company requires the customer to deposit before placing an order with the supplier. Please prepare the journal entry for advance received.

The company has required the customer to make an advance payment before delivering the goods. So it has to record as a liability rather than revenue.

The journal entry is debiting cash $ 420,000 and credit customer deposits $ 420,000.