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    Mar042013

    How do I record an advance to an employee?

    When an employee asks for an advance, this is recorded as a current asset in the company's balance sheet. There may not be a separate account in which to store advances, especially if employee advances are infrequent; possible asset accounts in which to store this information are:

    • Employee advances (for high-volume situations)
    • Employee loans (useful if the company intends to charge interest on funds advanced to employees)
    • Other assets (probably sufficient for smaller companies that record few assets other than trade receivables and fixed assets)
    • Other receivables (useful if you are tracking a number of different types of assets, and want to segregate receivables in one account).

    For example, if ABC International issues a $1,000 advance to employee Smith, it may record the initial transaction as:

      Debit Credit
    Other receivables 1,000  
         Cash   1,000

     
    No matter what method is later used to repay the company - a check from the employee, or payroll deductions - the entry will be a credit to whichever asset account was used, until such time as the balance in the account has been paid off.

    Employee advances require considerable vigilance by the accounting staff, because employees who have limited financial resources will tend to use the company as their personal banks, and so will be reluctant to pay back advances unless pressed to do so repeatedly. Thus, it is essential to continually monitor the remaining amount of advances outstanding for every employee.

    The best approach to handling employee advances is to prohibit them without the permission of senior management. Ideally, there should be very few employee advances per year.

    One situation in which employee advances may be warranted is when the company plans to shift to less frequent payroll cycles, which means that employees will experience an initial period when they are not being paid. For example, shifting from a one week payroll cycle to a monthly payroll cycle will require employees to initially go unpaid for a three-week period. This problem can be mitigated by granting employees payroll advances for the unpaid period, until the paychecks associated with the new payroll cycle are issued.

    Related Topics

    Payroll accounting
    Payroll entries
    Payroll internal controls

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    Reader Comments (2)

    What should I do about not paying back for employee advances?

    Should I report on his W-2 for this year's income or just leave as bad debt (dr ) employee advances (cr)?

    We issue advanced check amount $1500.00 to our former employee and he quite the job without pay back.

    Also the amount was not withholding any employment taxes so ...

    Should I calculate back for the gross amount of $1500.00 and then deduct all the employment taxes and file on his w-2 or just leave as bad debt .

    I called IRS and it seems like they were not sure about this case. One of rep. told me just report on the W-2 as supplemental income. So I asked what about 941 and 940 part? , and she said that "I am sure about that"...=(

    Can you help me about this?

    December 21, 2011 | Unregistered CommenterJOANNE

    You should record it as supplemental income on the employee's Form W-2. There is no need to withhold any taxes on this amount.

    December 21, 2011 | Registered CommenterSteven Bragg
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