Summary of [Budgeting] How do you handle the “advance payment”?
- How to account for advance payments?
- What type of account is an advance payment?
- What is the journal entry for advance?
- What type of account is advance payment for equipment?
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AI Overview
AI Overview
Advance payments are accounted for by
initially recording them as a liability (unearned revenue) upon receipt, rather than as revenue, because the goods or services have not yet been delivered. When the work is completed, the liability is reduced, and revenue is recognized. Key entries include debiting cash/bank and crediting a liability account like “Customer Deposits” or “Unearned Revenue”.
Accounting Process for Advance Payments Received (Seller Perspective):
Receipt of Payment: Debit Cash/Bank (Asset increases), Credit Unearned Revenue/Customer Deposits (Liability increases).
Performance of Service/Delivery: Debit Unearned Revenue/Customer Deposits (Liability decreases), Credit Revenue (Income increases).
Invoicing: When invoicing for the final, delivered product, subtract the previously paid deposit from the total amount due.
Key Considerations:
Accrual Accounting: Revenue is recognized when earned (service delivered), not when cash is received.
Balance Sheet Impact: Unearned revenue remains a liability until the performance obligation is met.
Example: A $1,000 deposit for a $5,000 job means $1,000 is initially recorded as a liability, and only the remaining $4,000 is typically invoiced/recognized upon completion, plus the initial deposit moved to revenue.
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[Budgeting] How do you handle the “advance payment”?
Example: We have a dinner and I pay for all. (or group gift, etc.).
Now I have 2 categories:
“Advance Payment”:
-
“income” (used to categorize the refound)
-
“outcome” (used to track my advance payment)
I create a payment with a split category, one for my dinner and the other as “Advance Payment > outcome”.
When I receive the refund, I mark this as income in the category “Advance Payment > Income”.
(the refund is async and I can’t make transfer)
Example transactions table:
In the previous tools, I managed that with this category but with YNAB is little weir because I don’t know in advance what is the budget and it doesn’t look the right way… How do you handle that cases?
Thanks 🙂
Edit: added example table used in @brandononrails answer Edit2: formatting