Advance Salary Journal Entry
Overview
In business, the company may need to make salary payments in advance for some reason. Likewise, the journal entry for advance salary will be required to account for the cash outflow in the company’s record.
The advance salary account is a current asset, in which its normal balance is on the debit side. When the company makes the usual salary payment to the employees, the amount of advance salary is used as the deduction to the payment amount. Hence, the balance in this account usually become zero when the company makes salary payment to employees.
Advance salary journal entry
The company can make the journal entry for advance salary by debiting the advance salary account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Advance salary | 000 | |
| Cash | 000 |
This journal entry does not affect the income statement. What it does is simply increasing one asset (advance salary) and decreasing another asset (cash) at the same time. Likewise, the net effect on the balance sheet is zero.
When the company makes the payment to the employees at the salary payment date (e.g. at the end of the month), it can make the journal entry to settle advance salary as below:
| Account | Debit | Credit |
|---|---|---|
| Salary expense | 000 | |
| Advance salary | 000 | |
| Cash | 000 |
Example
For example, the company ABC Ltd. has the policy to make the salary payment at the end of each month. On November 05, 2020, ABC Ltd. gave an advance salary to two of its employees in the amount of $5,000 for their urgent use. The salary expense in November amount to $45,000.
What is the journal entry for advance salary on November 05, 2020?
What is the journal entry when the company makes the salary payment on November 30, 2020?
Solution:
Advance salary on November 05, 2020
The company ABC Ltd. can make advance salary journal entry on November 05, 2020, as below:
| Account | Debit | Credit |
|---|---|---|
| Advance salary | 5,000 | |
| Cash | 5,000 |
Salary payment on November 30, 2020
When ABC Ltd. makes the salary payment to its employees on November 30, 2020, it can make the journal entry as below:
| Account | Debit | Credit |
|---|---|---|
| Salary expense | 45,000 | |
| Advance salary | 5,000 | |
| Cash | 40,000 |
In this journal entry, the cash outflow is only $40,000 even though the salary expense is $45,000 in November. This is due to the company has already paid the $5,000 salary in advance on November 05, 2020.