Advance Payment: Meaning, Journal Entry & GST Rules
Definition
An advance payment is money paid before goods are delivered or services are performed. For the payer it is an asset (advance to supplier) until the bill arrives; for the receiver it is a liability (advance from customer) until it is invoiced.
| Term | Advance payment |
|---|---|
| In Hindi | अग्रिम भुगतान (एडवांस पेमेंट) |
| Area | Accounting |
| Search phrase | advance payment |
| Try it | Journal entries |
अग्रिम भुगतान (एडवांस पेमेंट) — हिंदी में अर्थ
अग्रिम भुगतान वह रक़म है जो माल मिलने या सेवा पूरी होने से पहले दी जाती है। देने वाले के लिए यह बिल आने तक संपत्ति (सप्लायर को एडवांस) है और लेने वाले के लिए बिल बनने तक देनदारी (ग्राहक से एडवांस) है।
Journal entries
Advance paid to a supplier: Advance to Supplier A/c Dr, To Bank A/c. When the bill arrives: Purchases A/c and Input GST A/c Dr, To Supplier A/c. Then adjust: Supplier A/c Dr, To Advance to Supplier A/c — the balance due is the bill less the advance.
Advance received from a customer: Bank A/c Dr, To Advance from Customer A/c (a liability). On invoicing: Customer A/c Dr, To Sales A/c and Output GST A/c. Then adjust: Advance from Customer A/c Dr, To Customer A/c.
GST on advances
Goods: no GST is payable on advances received for the supply of goods (Notification 66/2017-Central Tax); GST is paid when the invoice is issued. Services: GST is payable on the advance when it is received — issue a receipt voucher, pay the tax for that month, and adjust it against the final invoice. If the order is cancelled, issue a refund voucher.
Advances in CRE8Rx ERP
An advance to a vendor is recorded in Accounts → Payments → New Payment by choosing '-- Advance Payment (No Bill) --' under Against Bill. Salary advances to employees are recovered in payroll through the Advances deduction. Customer receipts are recorded against an invoice.
Example
A fabricator pays a steel supplier ₹1,00,000 in advance. The bill arrives for ₹2,36,000 (₹2,00,000 + 18% GST). After adjusting the advance, ₹1,36,000 is due to the supplier, and ₹36,000 of input GST is available on the bill.
Related tools and guides
Frequently asked questions
What is an advance payment?
Money paid before goods are delivered or services are performed.
Is advance paid to a supplier an asset or a liability?
An asset for the payer, shown under current assets until the supplier's bill is adjusted against it.
Is GST payable on advance received?
Not for goods — tax is paid when the invoice is issued. For services, GST is payable when the advance is received.
What is the journal entry for advance received from a customer?
Bank A/c Dr, To Advance from Customer A/c. It is adjusted against the customer's account when the invoice is raised.
Related terms
- Accounts receivableAccounts receivable is the money customers owe a business for goods or services already supplied on credit. It is shown as trade receivables (debtors) under current assets.
- Accrual vs cash basis of accountingUnder the accrual (mercantile) basis, income and expenses are recorded when they are earned or incurred, whatever the payment date. Under the cash basis, they are recorded only when cash is actually received or paid.
- Balance sheetA balance sheet is a statement of what a business owns (assets) and what it owes (liabilities and owners' equity) on a particular date. Total assets always equal total equity plus liabilities.
- Cash conversion cycleThe cash conversion cycle (CCC) is the number of days between paying for raw material and collecting cash from the customer for the finished goods: days inventory outstanding plus days sales outstanding minus days payables outstanding.
- Contra entryA contra entry is a transaction between cash and bank accounts of the same business — such as cash deposited into the bank or cash withdrawn for office use — where both the debit and the credit side are cash or bank.
- Contribution marginContribution margin is selling price minus variable cost. It is the amount each sale contributes first towards fixed costs and then to profit; as a percentage of sales it is called the contribution margin ratio or P/V ratio.