Accounting for advances


L

Larry

My understanding is that advances are entered on the balance
sheet as an asset. When they are actually earned, they
become an expense and can be deducted? Is this correct, or
can they be expensed when paid rather than when earned. Or
is it something else entirely?

Thanks
 
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R

Rick Merrill

Larry said:
My understanding is that advances are entered on the balance
sheet as an asset.
'prepaid expense' sounds right to me.
When they are actually earned, they
become an expense and can be deducted?
You do mean deducted from the account (not from taxes) don't you:)
 
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H

Harry

Larry said:
My understanding is that advances are entered on the balance
sheet as an asset. When they are actually earned, they
become an expense and can be deducted? Is this correct, or
can they be expensed when paid rather than when earned. Or
is it something else entirely?
Advance payments BY you, for example insurance you pay for the
year but "use up" monthly work as you describe. Advance
payments TO you do not. These are liabilities and become
"revenue" (not expenses) when earned. This is called accrual
accounting. Most small taxpayers do not use the accrual method,
they use the cash method. Under the cash method expenses are
recognized when cash is paid, and revenues are recognized when
cash is received.

H
 
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P

Paul

Larry said:
My understanding is that advances are entered on the balance
sheet as an asset. When they are actually earned, they
become an expense and can be deducted?
Sounds about right.

Is this correct, or can they be expensed when paid rather
than when earned.
Many small businesses do just that. Any amount returned
goes against the expense (a credit) and any additional
reimbursement goes to expense. If the business needs to
accrue the expense/returned amount, it's easy to do.
 
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W

Wayne Brasch

Larry said:
My understanding is that advances are entered on the balance
sheet as an asset. When they are actually earned, they
become an expense and can be deducted? Is this correct, or
can they be expensed when paid rather than when earned. Or
is it something else entirely?
An advance to an employee is recorded as an Asset when paid
to them. In the next paycheck, that advance should be
subtracted in determining the net paycheck for that employee.
This is the point where that advance gets expensed as part of
salaries or wages.

Wayne Brasch
 
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D

D. Stussy

My understanding is that advances are entered on the balance
sheet as an asset. When they are actually earned, they
become an expense and can be deducted? Is this correct, or
can they be expensed when paid rather than when earned. Or
is it something else entirely?
This is really an accounting question and it belongs in an
accounting group.

An advance - by whom? The employer or the employee who
received it? Makes a difference as the employee would
probably record it as a liability, and then as income
when earned. Therefore, without knowing which party to
the advance you're talking about, we (or at least I)
cannot confirm the correctness of book entry.
 
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D

Dick Adams

Larry said:
My understanding is that advances are entered on the balance
sheet as an asset. When they are actually earned, they
become an expense and can be deducted? Is this correct, or
can they be expensed when paid rather than when earned. Or
is it something else entirely?
On the presumption that we are discussing accrual accounting:

Debit Credit
------------ ------------
Advance paid out: Prepaid Acct Cash
Monthly accrual: Expense Acct Prepaid Acct

Advance received: Cash Unearned Rev
Monthly accrual: Unearned Rev Revenue Acct

Taxes are unaffected by this process.

If you make an advance to an employee, it depends on whether
the advance is for expenses or payroll. If it is for expenses,
you keep a running total of advances and expense accounts and
you settle up at the end of the calendar year. Otherwise you
settle up at the next paycheck.

Dick
 
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