Journal Entry for Cash Paid in Advance

Journal entry for cash paid in advance is the process of the company paying cash to the supplier before receiving the goods or services.

The cash paid in advance from the company will help to guarantee the purchase with the supplier. It will show the commitment of the buyer to the seller. It will help to prevent the buyer from canceling the purchase. The buyer will almost guarantee to receive the goods or service. Supplier has the obligation to deliver the goods or service to the buyer after receiving advance payment.

Another advantage of paying cash in advance is that it often secures better pricing from the vendor. They have the customers’ money locked in, so they are able to provide a good price with good credit terms. This can be a significant saving, especially if the company makes a large purchase.

Of course, there are some disadvantages to paying cash in advance as well. Perhaps the most obvious is that you need to have the cash on hand. This can tie up a good portion of your working capital, which could be better used elsewhere in the business.

Additionally, if something goes wrong with the product or service, you may have a harder time getting a refund or resolution since you already paid for it. As with anything, weigh the pros and cons carefully before making a decision on whether or not to pay cash in advance.

A company that pays cash in advance is a type of business arrangement in which the customer makes an up-front payment to a supplier for goods or services that have yet to be provided. This type of arrangement is often used when one company needs to guarantee that it will receive a product or service from a supplier, so they need to lock the guarantee with the supplier. The supplier must deliver the goods or service, otherwise, it will require to pay back the cash advance plus the penalty.

In many cases, the company will pay a premium for the arrangement, which compensates the supplier for the risk it is taking on. While this type of arrangement can benefit both parties, it is essential to carefully consider all of the terms and conditions before entering into such an agreement.

Journal Entry for Cash paid in Advance

The company may require to make payment to the supplier in advance. It depends on the supplier’s term and conditions.

When the company paid cash in advance, it must be recorded as assets on the balance sheet. Most of the time, it is recorded as cash advance which is the current assets. We are not able to record it as an expense or the purchase of assets.

The journal entry debiting advance and credit cash.

Account	Debit	Credit
Advance	000
Cash		000

It will increase the advance which is the current assets on the balance sheet. The cash will be credited depending on the amount paid to the supplier.

The advance will be reversed when the purchase transaction is completed, it depends on the agreement between buyer and seller. Most of the time, the cash-paid advance will be settled with the amount purchased. The customer needs to pay the remaining balance at a certain point.

The journal entry is debiting assets/expense and credit cash advance, cash payment.

Account	Debit	Credit
Assets/Expense	000
Advance		000
Cash		000

Example

Company ABC is purchasing the machinery from the supplier cost $ 120,000. Due to the custom made, the supplier requires ABC to pay cash in the advance amount $ 50,000. Two weeks later, the supplier deliver the machine to ABC’s manufactory. Both parties have to inspect the machinery and accept the package.

One week later, ABC pay the remaining balance $ 70,000 to settle the accounts payable.

Please prepare journal entry for cash paid in advance and related entry.

Company ABC places orders with the supplier and it requires to pay cash in advance. The cash that is paid to the supplier will be classified as the current assets on the balance sheet. it is not yet recorded as machinery.

The journal entry is debiting an advance $ 50,000 and credit cash $ 50,000.

Account	Debit	Credit
Advance	50,000
Cash		50,000

When the supplier delivers the machinery, ABC needs to record the fixed assets on balance sheet. It also requires recording the additional liability to supplier as it not yet making final payment. The advance will be reversed to reduce the full amount of payable.

The journal entry is debiting machinery $ 120,000 and credit advance $ 50,000, accounts payable $ 70,000.

Account	Debit	Credit
Machinery	120,000
Advance		50,000
Accounts Payable		70,000

On the due date, ABC makes the final payment to supplier. The journal entry is debiting accounts payable $ 70,000 and credit cash $ 70,000.

Account	Debit	Credit
Accounts Payable	70,000
Cash		70,000