How to Account For Customer Advance Payments

A consumer may prepay for the delivery of products or the provision of services. The following are some of the possible causes for a customer advance.

Advancing the Customer Due to a poor credit rating

Payment in advance is required by the vendor because he refuses to give the client credit.

Due to a Custom Product, the Customer Advances.

Some products are so tailored that the vendor can’t sell them unless the customer pays upfront, hence they need upfront payment.

Advance Payment to the Client As a result of Cash Basis Accounting

Cash-basis accounting means the client wants to register a cost and minimize its taxable income for this tax year, therefore the customer wants to pay cash as quickly as feasible.

Advancing the Customer Reserved Capacity is the reason

To prevent a rival from using the seller’s manufacturing capacity, the buyer may have paid in advance.

Keeping track of a customer’s advance payment

A vendor may obtain an advance payment for any number of reasons, including those outlined above. Until the seller meets its commitments under the terms of the original sales agreement, the advance should be recognized as a liability on the balance sheet. Two journal entries are involved. These are their names of them:

  1. The first take. Credit the customer advances (liability) account with a debit to the cash account.
  2. Keeping tabs on the bottom line. Credit the revenue account by deducting the customer advances (liability) account.

Since an automatically reversing entry would reverse the amount of cash in the next month and the money paid is still in the cash account, it’s advisable not to record a client advance. Manually monitor each month’s customer advances account balance and manually convert sums when items or services are supplied or paid into revenues. In order to guarantee that each client advance is checked on a regular basis, this may need a distinct step in the month-end closure process.

Display of Purchase Advances

The seller’s balance sheet typically shows a client’s advance as a current liability. Nonetheless, if the underlying selling transaction is not expected to generate money within a year, the liability should be classed as a long-term obligation.

An Illustration of Customer Advance Accounting

A purple widget with a bespoke design costing $10,000 was purchased by a client of Green Widget Company. A debit of $10,000 is made from the cash account, and a credit of $10,000 is made to the customer advances account as a result of the receipt. A new journal entry is created by Green in the next month, debiting the customer advances account for $10,000 and crediting the revenue account for $10,000. Green will supply the custom widget in the next month.

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