Advance to Suppliers: Definition, Accounting, Journal Entry, Examples

A transaction between two parties involves some form of compensation. For most businesses, it occurs through cash or bank payments. In most cases, these payments happen when a customer buys a product or service from a supplier or at a later date. Sometimes, however, customers may also pay in advance to secure a future transaction. This payment may appear as an advance to a supplier on the balance sheet.

What is Advance to Suppliers?

Advance to suppliers is a payment made to suppliers for a future transaction. Usually, it occurs when a customer aims to secure a transaction in the future. For example, a customer pays a supplier to ensure they receive products during the busy season. Some suppliers may also require an advance as security to complete a job or project.

Add your business to our business directory https://harbourfronts.com/directory/ Add your business. Also check out other businesses in the directory

Advances to suppliers are prevalent in some industries more than others. For example, suppliers may require customers to pay advances to fund equipment purchases for construction. Later, when the customer receives the product or services, the supplier counts the advance as a payment. Customers may also pay a portion of the total price in advance and the remaining after the transaction gets completed.

How to account for Advance to Suppliers?

The accounting treatment for advance to suppliers differs based on the party in consideration. Usually, it appears on the customer’s balance sheet. For the customer, any amount paid in advance is an asset. On the balance sheet, it falls under current assets. In rare cases, it may also go under non-current assets if the delivery occurs after 12 months.

For the supplier, advance payments received from a customer are an obligation to deliver goods or services later. Therefore, it falls under the liabilities section in the balance sheet. However, suppliers may not use the same term to present it. Instead, suppliers may term it as advances from customers or treat it as deferred earnings. Usually, these advance payments fall under current liabilities.

What is the journal entry for Advance to Suppliers?

The journal entry for advance to supplier includes two stages. Firstly, when a company pays advances to a supplier, it records the amount as an asset. At this stage, the company has not received goods or services for payment. The journal entry to record this transaction is as follows.

Dr Advance to supplier
Cr Cash or bank

Later, when the company receives goods or services for payment, it must eliminate the balance. Since the payment has already occurred, the accounting treatment will be straightforward. The journal entry at this stage is as follows.

Dr Purchases
Cr Advance to supplier

Example

Red Co. paid a supplier an advance of $10,000 cash to secure a future transaction. At the time, the company used the following journal entry to record the transaction.

Dr Advance to supplier $10,000
Cr Cash $10,000

Four months later, Red Co. received goods from the supplier for which it had already paid the advance. The company recorded the transaction as below.

Dr Purchases $10,000
Cr Advance to supplier $10,000

Conclusion

Advance to suppliers is an account in the financial statements for prepayments to various suppliers. Usually, customers pay suppliers in advance to secure future purchases or as security for the transaction. The customer records this amount as a current asset in its accounts until it receives the products or services.

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSI'm the founder of Mud/Wtr and prefer to invest in employee health rather than perpetuate startup hustle culture
I'm the founder of Mud/Wtr and prefer to invest in employee health rather than perpetuate startup hustle culture

As many big firms call workers back to the office, Heath prioritizes the health of his 32-person staff by giving them Oura rings and access to doctors.

Stay up-to-date with the latest news - click here
LATEST NEWSRussia, China are not creating military alliance, Putin says
Russia, China are not creating military alliance, Putin says
Stay up-to-date with the latest news - click here
LATEST NEWSTurkmenistan votes for new, opposition-free parliament
Turkmenistan votes for new, opposition-free parliament

ASHGABAT, Turkmenistan (AP) — Voters in Turkmenistan headed to the polls on Sunday to elect a new parliament that is expected to be opposition-free and loyal to the government of the gas-rich Central Asian nation. A total of 2,602 polling stations opened in Turkmenistan at…

Stay up-to-date with the latest news - click here
LATEST NEWSI'm an underground miner making as much as $160,000 a year without a college degree. The job saved my life.
I'm an underground miner making as much as $160,000 a year without a college degree. The job saved my life.

I was lost in my 20s and didn't know what to do. So I moved to Nevada where I've been mining for 12 years. This is what the job is like.

Stay up-to-date with the latest news - click here
LATEST NEWSMiami spent years partying on a crypto-fueled high. I went to check out the brutal comedown.
Miami spent years partying on a crypto-fueled high. I went to check out the brutal comedown.

Miami was party central during the pandemic as tech bros and crypto kings flocked to Florida. Now it's like a scene from The Last of Us.

Stay up-to-date with the latest news - click here

2 Comments

Leave a Reply