How to record an advance to an employee
/An advance paid to an employee is essentially a short-term loan from the employer. As such, it 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).
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Optimal Accounting for Payroll
Example of the Accounting for an Employee Advance
For example, if ABC International issues a $1,000 advance to employee Smith, it may record the initial transaction as follows:
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.
FAQs
What if the employee spends less than the advance?
If the employee spends less than the advance, the unused portion must be returned to the company. Upon repayment, the company debits Cash and credits Employee Advances to clear the remaining receivable balance. If the employee fails to return the excess promptly, the balance may be deducted from payroll or reclassified in accordance with company policy.