Journal entry for advance paid to supplier

Introduction

In business, we may need to make an advance payment to our supplier in making the purchase of goods. In this case, we need to make the journal entry for the advance paid to the supplier in order to account for the cash outflow from our business as well as to recognize our right to receive the purchased goods in the near future.

An advance paid to the supplier may represent the whole amount of the purchases or only a portion of the purchase price. In this case, we may need to pay an additional amount upon receiving the goods if our advance payment to supplier only represents a portion of the purchased price.

The journal entry for advance paid to supplier does not impact the total assets on the balance sheet as a whole. After all, we make an advance payment in exchange for the right to receive the goods in the future. In other words, we just exchange one asset for another.

Journal entry for advance paid to supplier

We can make the journal entry for advance paid to supplier by debiting the advance to supplier account and crediting the cash account for the amount paid in advance.

The advance to supplier account is a current asset account on the balance sheet in which its normal balance is on the debit side. Likewise, this journal entry will increase an asset on one side and decrease another asset on another side.

Later, when we receive the purchased goods, we can clear the advance account with the purchases account with the journal entry of debiting the purchases account and crediting the advance to supplier account as below:

This journal entry is made when we have paid the full amount of the purchase price to the supplier in advance. Hence, when receiving goods there is no additional payment added.

However, if the advance payment that we made to the supplier represents only a portion of the purchased price and we need to make additional payment upon receiving goods, we need to include the additional payment in our journal entry as below:

The cash account in this journal entry is the amount we need to pay upon receiving the goods in order to cover the full price of the purchased goods. In other words, the amount of the advance to supplier plus the cash amount equals the purchase price in this case.

The purchases account used in the journal entry above is for the company that uses the periodic inventory system. If we use the perpetual inventory instead, we need to replace the purchases account with the inventory account as below:

Or,

This is due to, under the perpetual inventory system, we need to update the balance of inventory perpetually. In this case, when we receive the goods, we need to debit the inventory account as the inventory increase. Moreover, there is usually no purchases account in the chart of accounts if we use the perpetual inventory system.

Advance paid to supplier example

For example, on June 30, we make a $5,000 advance payment to one of our suppliers in order to make a purchase of goods. Although the goods are expected to arrive at our office next week on July 7, we need to pay the full amount of $5,000 purchase price in advance in order to purchase this type of goods.

In our company, we use the periodic inventory system to manage our inventory.

In this case, we need to make the journal entry for the $5,000 advance paid to the supplier by debiting this amount into the advance to supplier account and crediting the same amount into the cash account.

June 30:

This journal entry is made to account for the $5,000 cash outflow from our business as well as to recognize our right to receive the $5,000 purchased goods that we are expected to receive on July 7.

Later, on July 7, when we receive the purchased goods, we can make the journal entry to clear the advance to supplier account with the purchases account as below:

July 7:

Example 2:

For another example, assuming that we make an advance payment of only $1,000 to our supplier for the $5,000 purchased goods in the example above. And we will pay an additional $4,000 when we receive the goods on July 7.

In this case, our journal entry for advance paid to supplier will change to below:

June 30:

Likewise, when we receive goods and pay the additional $4,000 to our supplier on July 7, the journal entry for receiving goods will also include the $4,000 payment as below:

July 7: