Advance received

What it means

An advance received is a payment a company receives from a customer before goods or services are delivered. In the books it is not revenue but a liability to the customer, because nothing has yet been supplied. Revenue arises only on delivery and final invoicing.

Advances received are recorded on account 324. On settlement the supplier issues a final invoice deducting the advance, and the balance on account 324 is cleared. Its counterpart on the customer’s side is the advance paid.

For a VAT payer an advance received also matters for tax. The tax point arises on the day the payment is received if it relates to a future taxable supply, and the supplier must issue an invoice for the payment received within the statutory deadline.

How it works in practice

Before payment we send the customer a payment request or pro forma invoice, which is not a tax document. Once the money arrives we issue a tax document for the payment received with VAT and record the payment as an advance.

On the final invoice we deduct the advance including VAT and check whether the VAT rate has changed in the meantime. If it has, the difference is dealt with on the final invoice. Unsettled advances at year end are broken down by customer, and we check whether delivery is still to come.

For online shops with prepayment and later delivery we watch advances at month and year ends. Goods paid for in December and shipped in January are an advance in December, not sales, even though VAT on the payment received has already arisen.

What to watch out for

If a deal is cancelled and the advance refunded, the VAT must be corrected too. The supplier issues a credit note or corrective document to the invoice for the payment received and reduces its VAT in the period of refund. Without a corrective document, the company would pay VAT on money that is no longer its own.

An advance received should not be confused with deferred income. Deferred income arises from a supply already invoiced that relates to a later period, whereas an advance is a payment before the supply itself. Confusing them changes both the statements and the tax base.