What is advance payment?

Advance payment is a system in which an employee temporarily pays expenses that should be paid by the company, and then receives reimbursement later through accounting.

Because advance settlement is a frequently performed task in accounting settlement work, employees involved in accounting need to understand the basic flow and accounting entries. However, some people may feel anxious because they do not know the specific procedures or account items.

This article explains the overview of advance settlement, the basic flow, and how to make accounting entries. It also explains how to make advance settlement work more efficient, so if you are having issues with advance settlement work, be sure to read to the end.

What is advance payment?

Advance payment refers to a process in which an employee temporarily pays expenses that should be paid by the company, and then the company reimburses the employee through a procedure at a later date.

Specifically, the following cases are eligible for reimbursement:

• Stationery costs necessary for business purposes
• Travel expenses to business trip destination
• Dining expenses with business partners

However, advance payment will only be made for items that the company recognizes as “necessary for business purposes.”

The standards for what constitutes “business necessity” vary from company to company, and in some cases, it may not be treated as an expense and payment may not be permitted.

Advance Payment Procedure: Step-by-Step Guide

Here we will explain the general method of advance payment in a company in the following steps.

• [Employee] Receiving receipts
• [Employee] Creating a request document
• [Employee] Get approval from your supervisor
• [Accounting] Confirmation and journal entry
• [Accounting] Payment to employees

Please note that some companies have their own rules, so be sure to check your company’s rules in advance.

[Employee] Receiving receipts

First, the employee who made the payment will receive a receipt from the store.

When making payments on behalf of someone, you will need documents such as receipts to prove how much was used for what. Make sure your employees know to always ask for receipts when making payments on behalf of someone.

Even if you receive a receipt, if there are any errors in the contents, it will not be accepted. It is important to check that the following information is included to ensure there are no errors.

• A statement that it is a receipt
• address
• Amount 
• Proviso
• Issuer’s name and seal
• Issue Date

[Employee] Creating a request form

The employee who made the advance payment prepares a request form and submits it to their supervisor.

If there are any errors in the content, you will have to go through the trouble of resubmitting the form. In some cases, this may also lead to delays in settlement, so please make sure there are no omissions or errors.

[Superior] Supervisor’s approval

The supervisor who receives the request will check the contents and, if there are no problems, will submit the request to the accounting department. If there are any problems, the employee will need to take action such as checking or sending it back.

[Accounting] Confirmation and journal entry

The accounting staff who receives the request will check the contents of the request and, if there are no problems, will enter the transaction in accordance with the company rules.

Some companies have their own accounting rules, so it is important to check in advance.

Accounting] Payment to employees

Finally, paying your employees.

The timing of payments varies by company, such as on payday or on an ad-hoc basis. Just like with accounting entries, check in advance to make sure you don’t miss any payments.

Accounting for Advance Payments: Journal Entries and Account Titles

Here we will explain the accounting entries and account items to be used when making advance payments.

Timing of journalizing advance payments

The time when advance payments are recorded is usually when the accounting staff receives the request form and receipt and makes the payment to the employee.

Therefore, there is no need to record accounting entries when an employee advances a payment.

Record advance payments

There are two main methods for accounting for advance payments, which differ depending on whether the accounting entry and payment to the employee are made at the same time or whether the accounting entry and payment to the employee are not made at the same time .

When the accounting entry and payment to the employee are made at the same time, the accounting entry is as follows:

Debit		Credit
Account	Amount	Account	Amount
Consumables cost	$1000	Cost	$1000

The journal entry is complete once the debit is recorded as the appropriate account item and the credit is recorded as cash, etc.

On the other hand, if there is a gap between the accounting entry and payment to the employee, it will be recorded as “accounts payable” until payment to the employee is completed.

Then, once payment has been made to the employee, it is recorded as “cash” and offset.

Debit		Credit
Account	Amount	Account	Amount
Consumables cost	$1000	Account Payable	$1000
Account Payable	$1000	Cash	$1000

Account Title

When accounting for an advance payment, you must use the account item appropriate to the content used.

Below is a table of expenses that are often paid in advance and the commonly used account items. Please use this as a reference when making accounting entries.

However, the types of expenses and account headings differ depending on the company, so be sure to check your company’s rules as well.

Description	Account
Travel expenses such as train and air fares to business trips and sales destinations, and accommodation expenses	Travel expenses and transportation expenses
Purchase expenses for stationery, gasoline, etc.	Consumable Cost
Costs for entertaining business partners and gifts, etc.	Entertainment expenses
Fees for venues used for meetings, copying of documents, tea, etc.	Conference Fees
Courier and postcard charges, mobile phone charges, etc. used for business purposes	Communication Cost
Food and drink expenses for specific occasions such as year-end and New Year parties	Employee Benefits

3 Key Considerations for Managing Advance Payments

Advance payment occurs frequently and requires a lot of effort to process, making it a task that can easily become burdensome for both accounting staff and those in charge of advance payments.

Here we will explain the points to keep in mind to reduce the burden of advance payment operations and operate them smoothly.

• Clarify rules regarding advance payment
• Set the payment deadline
• Avoid high advance payments as much as possible

Clarify the rules for advance payment

In order to operate advance settlement smoothly, clear rules and documentation are necessary.

If the rules regarding reimbursement are unclear, it is easy for incomplete documentation to cause hassle and for inappropriate expense claims to occur, which inevitably leads to a burden on accounting staff and those responsible for reimbursement.

Clarify the rules for advance payment, such as application procedures, scope of eligibility, and maximum amounts, and make them known to those in charge of advance payment.

Set a deadline for payment in advance

Setting a payment deadline is also important. If you do not set a payment deadline, accounting staff will face risks such as “accounting processing being delayed” or “work increasing dramatically in certain months.”

It may also lead to problems for the person making the payment, such as losing receipts or having the details or amount become unclear.

By clarifying the payment deadline, you can prevent the above problems and proceed with payment settlement smoothly. Although there is no specific deadline, one month is recommended as a guideline.

Avoid High advance payments as much as possible

High advance payments can be a big burden for employees. Employees who travel frequently may have to pay more than $1,000 in advance.

High expenses can lead to employees quitting their jobs, so if you are experiencing a lot of high expenses, you should consider taking measures.

Specifically, introducing an advance payment system in which necessary expenses are paid to employees in advance, or a corporate credit card, as described below, can help reduce the burden on employees.

How to Streamline Advance Payment Processing

There are several ways to streamline advance payment, but here we will introduce three particularly effective methods.

• Corporate credit cards
• Promoting paperless operations
• An accounting system

Corporate credit cards

One way to make advance payments more efficient is to introduce a corporate credit card. A corporate credit card is a credit card that is issued primarily to corporations and sole proprietors.

It has a larger credit limit than individual cards, and is equipped with features that make it easy for business use, such as the ability to issue additional cards for employees.

By providing corporate credit cards to departments and employees who make a lot of advance payments, you can reduce the work involved in advance payments and the financial burden on employees.

However, corporate credit cards require an annual fee, so be aware that if you do not clearly define operational rules, unexpected usage may occur.

Promotion of paperless operations

Promoting a paperless system is also an effective way to make advance payment settlement more efficient.

Storing and managing accounting documents digitally provides benefits such as “saving the hassle of printing” and “eliminating the need for storage space for documents.”

The Electronic Bookkeeping Act now makes it mandatory to store electronic data in electronic transactions. By promoting paperless operations, you can smoothly comply with this obligation, so we recommend that you do so.

An Accounting system

The most recommended way to streamline expense settlement operations, including advance payment, is to introduce an accounting system.

This system is equipped with functions to automate and streamline operations, and introducing it can provide the following benefits:

• Work can be done online, so approvers can work from anywhere
• It can be linked to external tools such as accounting software, allowing you to centralize information entry.
• If the system has an OCR (optical character recognition) function, tasks such as manually entering receipts can be reduced.

There are some disadvantages, such as the fact that introducing the system requires a certain amount of cost, but considering the benefits that can be obtained, it can be said that the cost-effectiveness is high.