A payroll advance journal entry is used when a business wants to give an employee a cash advance of their wages. The payroll advance is in effect a short term interest free loan to the employee to be repaid when they next receive their wage payment.
At the time of the wage advance, the employee has not earned the wages as they have not yet provided a service to the business, and the amount needs to recorded as a receivable on the balance sheet of the business under the heading of current assets.
Depending on the frequency at which the business has to provide payroll advances, it might set up a separate general ledger account such as, payroll advance account, wage advance account, salary advance account, or simply record the transaction as an other receivable.
Payroll Advance Example
A business provides a cash advance to an employee part way through a month for 300. The amount is to be repaid at the end of the month when the employee receives payment of their wages for the month.
Payroll Advance Journal Entry
When the wage advance is made to the employee, the business will record the following payroll advance journal entry.
|Payroll advance account||300|
As the employee has not yet earned the wages, the advance is an asset of the business representing the services to be provided by the employee at a future date. The amount is recoverable from the employee from their wages at the end of the month, and is therefore recorded as a receivable.
The Accounting Equation
The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity of the business. This is true at any time and applies to each transaction.
For this transaction the accounting equation is shown in the following table.
|– Cash + Advance||=||None||+||None|
|– 300 + 300||=||0||+||0|
In this case one balance sheet asset (cash), has been decreased by 300, and replaced by an increase in another balance sheet asset (payroll advance).
Payroll Advance is Repaid by the Employee
At the end of the month, the employee will have earned the wages, and the payroll advance needs to be recovered.
Suppose in the above example the net wages due to the employee were 1,100. Normally the employee would be paid the amount of 1,100, however in this case the wage advance of 300 made earlier in the month needs to be deducted from the amount due, and the employee will be paid the balance of 800.
The journal entry to record this is as follows:
|Net pay control account||1,100|
|Payroll advance account||300|
In this instance the balance on the net pay control account, which would have been a liability of 1,100 from the usual payroll journal entries, is cleared by a credit to cash of 800, and a credit to the advance account for 300. The credit to the advance account reduces its balance is zero.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.