A cash advance received from customer journal entry is required when a business receives a cash payment from a customer in advance of delivering goods or services. This type of situation might occur for example when a business demands cash in advance to pay for materials on a large or bespoke order or as a rental deposit on a property.
As the goods or services have not been delivered, the revenue from the sale has not been earned, and the cash receipt must be recorded as a liability in the balance sheet. If delivery is expected within the next year, then the liability will be shown as a current liability, if not, then it should be shown as a long-term liability in the balance sheet.
For example, suppose a business receives an order from a customer to manufacture a product and, due to the size of the order, requires 8,000 cash advance from the customer. The product has not been manufactured or delivered and therefore the revenue has not been earned and so must be recorded as a liability.
The cash advance received from customer journal entry will be as follows.
Cash Advance Received From Customer Journal Entry
The accounting records will show the following bookkeeping entries for the cash advance received:
Cash Advance Received From Customer Bookkeeping Explained
The business has received cash from the customer.
The cash represents an advance payment for goods to be delivered in the future. As the revenue has not been earned it must be recorded as a liability. In this case the amount is shown in the cash advances account. Alternatively, providing the cash advance relates to revenue, a deferred or unearned revenue account could have been used.
Accounting Equation for Cash Advance Received From Customer
The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the total 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.
In this case one asset (cash) increases representing money received from the customer, this increase is balanced by the increase in liabilities (cash advances account). The credit to the cash advances account represents a liability as the product still needs to be manufactured and delivered to the customer.
Cash Advance and Revenue Recognition
As soon as the products have been manufactured and delivered to the customer, the revenue from the sale can be recognized by the business.
In practice, the sale will be invoiced to the customer creating an accounts receivable balance, and then the balance on the accounts receivable account will be cleared by the cash advance received.
Suppose in the above example, the cash advance represented the entire amount due, then the journal entry to record this would be as follows:
The sale is invoiced to the customer, and the liability on the cash advances account is extinguished against the amount due from the customer on the accounts receivable account.
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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.