Advance Payment

Reviewed by Bhavana | Updated on Aug 27, 2020

Meaning of an Advance Payment

Advance payment is a kind of payment made in advance of its normal schedule, such as payment for a good or service before you actually receive it. Advance payments sometimes are needed by sellers to protect against non-payment or to cover out-of-pocket service or product costs.

There are many cases in which advance payments are required. Consumers with bad credits may be required to pay companies in advance, and insurance companies generally require an advance payment in order to extend coverage to the insured party.

Importance of Advance Payments

Advance payments are sums charged before the goods or services are finally received. The balance due, if any, shall be paid as soon as the payment is made. These forms of payments are in contrast to deferred payments — or arrears payments. In these instances, goods or services are delivered first and then paid for later. For example, an employee who is compensated for that month's work at the end of each month.

Advance payments are reported as assets on the balance sheet of the company. When these assets are used, they are spent and reported on the income statement for the period in which they are incurred.

Advance payments are typically made in two cases. They may refer to the sum of money paid before the contractually negotiated due date, or they may be needed before the goods or services demanded are obtained.

Special Considerations Concerning Advance Payments

Within the business sector, businesses often have to make advance payments to suppliers when their orders are high enough to be burdensome for the manufacturer. It is particularly valid if the customer wants to withdraw from the offer before delivery.

Advance payments may benefit suppliers who do not have enough cash to buy products to meet a large order, because they will use some of the money to pay for the product they are making. This may also be seen as a guarantee that a certain amount of revenue will come from the output of a large order.