Understanding Advance Payments

Advance payments are amounts paid before a good or service is actually received. The balance that is owed, if any, is paid once delivery is made. These types of payments are in contrast to deferred advanced payment
payments—or payments in arrears. In these cases, goods or services are delivered first, then paid for later. For example, an employee who is paid at the end of each month for that month’s work would be receiving a deferred payment.

Advance payments are recorded as assets on a company’s balance sheet. As these assets are used, they are expended and recorded on the income statement for the period in which they are incurred.Advance payments are generally made in two situations. They can be applied to a sum of money provided before a contractually agreed-upon due date, or they may be required before the receipt of the requested goods or services.In the corporate world, companies often have to make advance payments to suppliers when their orders are large enough to be burdensome to the producer. This is especially true if the buyer decides to back out of the deal before delivery.