Advance received from Customer and advance paid to supplier
    1Feb, 2021
    Journal entry of Advance received from Customer and advance paid to Supplier

    Journal entry of Advance received from Customer and advance paid to Supplier

    Advance received form Customer 

    When Advance received from customers that is current liabilities as its our obligation for us to deliver goods and service in future. Before going further we have to understand what is Advance paid through the accounting rule of assets and libilities

    When we have to ADD Asset in business,

    we have Debit that accounts

    When we have to Deduct MINUS Asset in business

    we have Credited that accounts

    When we have to ADD Liability in business

    we have Credited that accounts

    When we have to Deduct MINUS Liability in business 

    we have Debit that accounts

     

     

    A cash advance received from customer journal entry is required when a business receives a cash payment from a customer in advance of delivering goods or services. in return of it.

    Advance paid to Supplier

    When an advance is paid to the supplier in such condition we are adding our asset as in the exchange of our money the supplier will provide our goods and services in future .When Advance paid to supplier hat is current Asset as its our right to get deliver goods and service in future. Before going further we have to understand what is Advance paid through the accounting rule of assets and libilities as mention above table.

     

     

    Example of advance received and advance paid journal entry

    Example 

    A ltd sign a contract with B ltd for consulting services Rs 50,000 and received Rs 20,000 cash in advance.

    Here things to be noted that we did not need to make a entry of contract only journal entry of advance need to be made in the book A ltd and B ltd.

    In the books of A ltd 

    Journal Entry will Be

             

    PARTICULAR

    AMOUNT

    AMOUNT

    Cash A/c Dr. 

    20,000

     

     To Advance from  B ltd

     

    20,000

    (BEING CASH RECEIVED IN ADVANCE FROM B LTD)

     

     

     

    Note : Advance from B ltd is liability as the money  received in advance for service to be provided in future therefore its our obligation to provide service and as we are adding liabilty to our business therefore we are adding to our business.

     

    Account

    Implementation

    Cash

    Debit as cash is coming in business

    Advance received form B Ltd

    Credit as liability is added to business

     

    In the books of B Ltd

    PARTICULAR

    AMOUNT

    AMOUNT

    Advance paid to A ltd

    20,000

     

     To  cash

     

    20,000

    (BEING CASH PAID IN ADVANCE FROM A LTD)

     

     

     Note : Advance paid to A ltd is assets in the bookd of B ltd as he has to receive service in future hence we are increasing our asset in business therefore we are adding it .

    Account

    Implementation

    Advance paid to A ltd

    Debit as Asset is added in business

     Cash

    Credit as Cash is going out

    Adjustment of Advance received

    Paid future remaining advance to B ltd Rs 30,000 and get a invoice from Party.

    as mention above we have created our assets and libilities in the book of A

    Journal entry In the books of A ltd

    PARTICULAR

    AMOUNT

    AMOUNT

    Cash A/c Dr. 

    20,000

     

     To Advance from  B ltd

     

    20,000

    (BEING CASH RECEIVED IN ADVANCE FROM B LTD)

     

     

    Adjustment of advance in the book of A ltd

    PARTICULAR

    AMOUNT

    AMOUNT

    Advance from B ltd

    20,000

     

    To Consulting service A/c

     

    20,000

    (BEING ADVANCE ADJUSTED AGAINST SALES)

     

     

     

    Comparison of Journal entry

    ADVANCE RECEIVED FROM CUSTOMER

    ADVANCE PAID TO SUPPLLIER

    B is our customer

    A is our supplier

    When advance is received from customer Rs. 5000

    When advance is paid to supplier  Rs.  5000

    Bank A/c  Dr     5000

        To B advance received A/c    5000

    (Being advance received)

    A  advance paid A/c  5000

        To bank A/c                      5000

    (Being advance paid)

    When invoice is raised Rs 10,000

    When invoice is received Rs. 1000

     B advance received A/c Dr.    5000

      B                                     Dr.       5000

            To Sales A/c                                    10,000

    (being sale made)

    Purchase A/c Dr       10,000

       To A                                         5000

        To A  advance paid A/c   5000

    (being purchase made)

     

    Note :

    • B advance received is our liability.
    • A advance paid is our asset .
    • When bill are raised and received we adjust our assets and liabilities .

     

    Advance receipt and Advance paid in balance sheet

    Liabilities

    Amount

    Asset

    Amount

    Advance received

    from customer

    Xxxx

    Advance paid

    To supplier

    xxxx

    Journal entry of Receipt on Advace in GST in service

    Advance received from the customer with GST

    Mohan received Advance  Rs 118,000 on 1 Jan 2021. from Krishna Traders local trader.

    Particular

    Amount

    Bank a/c Dr.

    118,000

       To Krishna Traders

       118.000

    (being advance received from Krishna)

    Now this advance include 18,000 GST amount which is

    CGST 9000

    SGST 9000

    Now on 31 Jan 2021.

    Particular

    Amount

    Tax on Advance a/c Dr.

    18,000

       To Output CGST

       9.000

       To Output SGST

       9,000

    (being tax paid in advance)

    When a sale is made 

    Particular

    Amount

    Krishna Traders Dr

    118,000

       To Sales

       100000

       To Output SGST   A/c

            9,000

       To Output CGST A/c

            9,000

    (being sales made )

    		 

    Particular

    Amount

      Output CGST A/c Dr

    9,000

       Output SGST A/c Dr

    9,000

            To Tax on Advance A/c

       18,000

    (being an adjustment of advance)

    Note no GST on advance on goods under GST but on service, it is still applicable.

    Thus, advance payment under GST made in respect of the supply of goods would not attract any GST liability. However, the liability of on the advance payments for supply of services would continue to exist.

     

    Difference between Advance received from Customer and advance paid to Supplier

    Aspect

    Advance received from Customer

    Advance paid to Supplier

    Definition

    A prepayment received from a customer before delivering goods/services.

    A prepayment made to a supplier before receiving goods/services.

    Perspective

    Supplier/Service Provider receives the advance

    uyer/Customer pays the advance.

    Nature

    Recorded as a liability.

    Recorded as an asset (prepaid expense).

    Accounting Treatment

    Initially, recorded as a liability account (e.g., “Advance from Customers”) When goods/services are delivered, the liability is reduced, and revenue is recognized.

    Initially, recorded as an asset account (e.g., “Prepaid Expenses”). When goods/services are received, the asset is reduced, and expenses are recognized.

    Purpose               

    Provides assurance to the supplier that the customer is committed to the purchase.

    Ensures the supply of goods/services from the supplier or secures favorable terms.

    Example

    A company receives $1,000 in advance from a customer for a future order.

    A company pays $2,000 in advance to a supplier for an upcoming shipment of goods.

     

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    31Jan, 2021
    What are prepaid expense and their journal entry in Accounting?

    What are prepaid expenses and their journal entry in Accounting?

    Prepaid expense

    A prepaid expense is an expense that is paid in advance and its benefits is yet to received ..

    A prepaid expense is an advance payment of expense before its benefits is yet to be received.

    Prepaid expenses is which type of account

    Prepaid expense are Asset by nature and comes under the category of Current Assets.

     

     

    Journal entry of prepaid expense ?

    Before understanding prepaid expense journal entry we have to understand the rule of debit and credit in accounting.

    Point to remember before creating journal entry of Perpaid Expense 

    1. When we have to ADD Asset in business we have Debit that accounts
    2. When we have to MINUS Asset in business we have Credited that accounts
    3. When we have to ADD Liability  in business we have Credited that accounts
    4. When we have to MINUS Liability  in business we have Debit that accounts

    We can understand prepaid expenses with the example.

    Suppose we have paid our  Rent in advance paid to to its tenant Rs 10,000

    Journal entry for the same will be 

    Prepaid Rent A/c Dr 10,000

         To cash A/c Dr.           10,000

    (being rent paid in advance )

    Here Prepaid rent is Asset therefore its debited and added in business. 

     

     

    Example of Prepaid Expense

    Example :- Rent paid for Jan  Rs 10,000 actual rent Rs 5,000.

    Journal entry for the above transaction will be.

    Prepaid Rent A/c 5,000

    Rent A/c               5,000

    To Cash A/c            10,000

    (being rent paid and prepaid )

    here we have paid Rs 5,000 as advance rent which is an asset we have to adjust it in future.

    Here we add Prepaid Rent because we ADD Asset to our business.

    Now when the month Feb will come to the journal entry will be an adjustment of Advance rent which we have paid earlier.

    Rent A/c 5,000

      To Prepaid Rent A/c 5,000

    (being rent paid and prepaid adj)

    here we Credit Prepaid account because its minus our asset from the business

    Example of Outstanding Salary expense

    Salary paid for the month of Jan Rs 5,000 actual salary Rs 10,000

    Journal Entry for the same will be .

    Salary A/c   Dr.      10,000

    To cash A/c                5,000

    To salary payable A/c  5000

    Credit liability as Liability ADD

    (being salary paid and payable salary)

    Now in the month of feb the adjustment of salary will be made.

    Salary A/c Dr.    10,000

    Outstanding salary A/c Dr. 5,000

    To cash A/c                           15,000

    (being salary paid  of last month salary)

    Debit liability to deduct liability – from business

    Example of salary outstanding expense

    Salary paid for the month of Jan Rs 15,000 actual salary Rs 10,000

    Journal Entry for the same will be .

    Prepaid Salary A/c Dr. 5,000

    Salary A/c   Dr      10,000

    To cash A/c                15,000

    Debit  Asset to ADD Asset + from business

    (being salary paid with advance salary)

    Now in the month of feb the adjustment of salary will be made.

    Salary A/c Dr.    10,000

    To cash A/c               5000

    To Prepaid Salary A/c 5000

    (being salary paid and adjustment of last month salary)

    Credit Asset to deduct Asset – from business

    Adjustment at the end of Accounting year

    Our accounting Start at 1 April and  end on 31 of March every year 

    Therefore the accounts closed on 31 of the march have closing balances and the accounts on 1 April have opening balances.

    Example :

    Expense paid in advance at the end of the accounting year is Prepaid expense.

    Suppose stationary purchase during a year Rs 12,000 but the stationary unused left Rs 5,000

    therefore we have to pass an entry at the end of the accounting year 

    Unused stationary A/c  5,000

      To stationary A/c               5,000

    (being stationary unused)

    Note: This unused stationery is an asset by nature and it can be transferred to next year as opening unused stationery.

    Similarly, our prepaid salary, Prepaid rent, and all prepaid expense which not paid in the particular accounting period are transfer to the next accounting year as the opening.

    Note: Expense is not transferred to the next accounting year its only asset and liabilities which are transfer to the next accounting year. but expense which are outstanding and prepaid are shown in Profit and loss and trading accounts. 

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