Advance Salary Journal Entry
For some reason, the business may have to pay salaries in advance. Similarly, in order to record the cash outflow in the company's records, a journal entry for the advance salary will be necessary. As a current asset, the advance salary account often has a debit balance. The amount of the advance salary is deducted from the payment amount when the business pays the employees their regular salaries. As a result, when the business pays employees their salaries, the balance in this account typically drops to zero. In this article, we will explain the treatment of advance salary in terms of journal entry.
Table of Contents
Salary Paid in Advance
Prepaid salary is another name for the word salary received in advance. Because it provides some future economic benefit and is charged when the actual benefit is realized in the subsequent accounting period, an advance salary is originally recorded as an asset. On the debit side of the profit and loss statement, the amount of the prepaid salary is displayed after being subtracted from the salary. In the balance sheet, it is further displayed under the heading of current assets. Prepaid salaries, often known as salaries received in advance, are therefore considered adjustment entries.
Journal Entry for Advance Salary
By debiting the advance salary account and crediting the cash account, the business can create a journal entry for the advance salary. The income statement is unaffected by this journal entry. It merely increases one asset (advance salary) while simultaneously diminishing another value (cash). Similarly, there is no net impact on the financial sheet. The business can make the following journal entry to settle the advance salary when it pays the employees on the salary payment date.
Illustration:Â X Ltd gave its employees their four months' deferred salaries on March 1st, totalling Rs. 40,000 (10,000 * 4). Examine how the organization handles the sum that is given to employees as a prepaid wage. The following are the journal entries for the transaction by entering the adjustment and documenting the payment.
Traditional Approach:
Payment for prepaid salary made
Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
March 1st | Prepaid Salary a/c Dr | - | 40,000 | Representative Personal | Debit– The receiver |
- |  To Cash/Bank a/c | - |  40,000 | Real | Credit– What goes out of the business |
Amount of prepaid salary adjusted to salary
Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
Aug 3rd | Salary a/c   Dr | - | 10,000 | Nominal | Debt– All Expenses and Losses |
- |  To Prepaid Salary a/c | - |  10,000 |  Representative Personal | Credit– The Giver |
Modern Approach:
Payment for prepaid salary made
Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
March 1st | Prepaid Salary a/c Dr | - | 40,000 | Asset | Debit– The Increase in Asset |
- |  To Cash/Bank a/c | - |  40,000 | Asset | Credit– The Decrease in Asset |
Amount of prepaid salary adjusted to salary
Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
Aug 3rd | Salary a/c    Dr | - | 10,000 | Expense | Debit– The Increase in Expense |
- |  To Prepaid Salary a/c | - |  10,000 | Asset | Credit– The Decrease in Asset |
Conclusion
The purpose of the salary paid journal entry is to document the amount that the employer has paid the employee. Therefore, there will be a credit to the bank account and a debit to the salary or salary payable (if there is already an accrual of responsibility). The sum of money owed by an employee to a business for future services rendered is known as the advance to workers. Since advances to employees have not yet been incurred, they are not shown as expenses on the income statement. When an employee provides services for which they have been paid in advance, the business will record the expense.Â
FAQ
Q1. What is the salary paid in advance?
Paying a portion of an employee's salary in advance is known as a salary advance. For instance, the business may pay a portion of an employee's salary in advance if the person suffers a medical emergency and needs his February paycheck in advance. Usually interest-free, the advances are recouped in installments.
Q2. Is advance salary an asset or a liability for an employer?
An advance given to an employee is a short-term loan from the company. As a result, it appears on the balance sheet of the business as a current asset.Â
Q3. How is the advance salary repaid?
Typically, the advance is subtracted from an employee’s subsequent pay payments over a predetermined time frame or in accordance with the company's payback policy.
Q4. How do you record advance salary?
The cash advance must be recorded as an increase in an asset account, such as an Advance to Employees or Other Receivables: Advances, and a decrease in the company's cash account. (This account will be listed as a current asset if the amount is anticipated to be paid back within a year.)
Q5. What is an advance salary journal entry?
A journal entry is made by the business when it pays an employee's wage in advance. To represent the amount paid in advance and show a decline in the company's cash or bank balance, debit the Salary Advance account.
Q6. What is the journal entry for salary paid to employees?
Two accounts are included in the journal entry for a salary paid to an employee: one for the cash account and one for the salaries and wages expense. Choosing the sums that will be entered into each account is the next stage.
Q7. Why would you do a journal entry?
A journal entry's objective is to precisely and completely document each business transaction, whether it be digitally or physically. The journal entry will also specify whether a transaction impacts more than one account.
Q8. How to write a journal entry for salary outstanding?
Since it is a cost for this year only, any unpaid salaries from the fiscal year should be added to the salary on the debit side of the profit and loss statement. Likewise, if a salary is paid in advance and isn't changed throughout the year, it will be subtracted from the salary on the profit and loss side.
Q9. How is advance salary recorded in accounting books?
Advance salary is recorded as a prepaid expense (asset) in the employer's books until it is adjusted against future salaries.
Q10. Does advance salary affect income tax deductions?
Yes, advance salary is taxable in the year it is received and is included in the employee’s taxable income.
Q11. What is the journal entry for paying an advance salary?
The entry is:Dr. Advance Salary (Asset)Cr. Cash/Bank
Q12. How is advance salary adjusted in payroll?
When adjusting, the entry is:Dr. Salary ExpenseCr. Advance Salary
Q13. Can advance salary be recovered if an employee leaves the company?
Yes, it can be recovered from the final settlement, or written off if irrecoverable.
Q14. Is TDS deducted on advance salary?
Yes, TDS is deducted at the time of payment since it is considered part of the employee’s taxable income.
Q15. How does advance salary impact financial statements?
It appears as a prepaid asset in the balance sheet and gets adjusted over time in salary expenses.
Q16. Is advance salary a loan?
No, it is an early payment of earned wages and not considered a loan, unlike salary advances which are repayable.
Q17. Does advance salary require employee consent?
Yes, a written agreement is recommended to outline terms of recovery and tax treatment.
Q18. Can advance salary be given in installments?
Yes, it can be disbursed in multiple payments, depending on company policy.
Q19. What happens if an employee repays the advance salary?
If repaid, it is recorded as:Dr. Cash/BankCr. Advance Salary
Q20. Is advance salary applicable to contractual employees?
It depends on the employment terms. Regular payroll employees are more commonly given advance salaries.
Q21. Can advance salary be part of employee benefits?
Yes, some companies offer advance salary as an employee-friendly policy for financial assistance.
Q22. Does advance salary affect provident fund (PF) and ESI?
No, PF and ESI deductions apply only to actual salary earned, not advance payments.
Q23. Is GST applicable on advance salary payments?
No, GSTÂ does not apply to advance salary since it is not a service but a payroll component.
Related Posts
See AllOpening a bank account is an essential step in managing your finances. In India, it requires submitting specific documents to comply with...
Advance tax is a crucial part of the tax-paying process for individuals and businesses earning income that is not subject to tax...
