• The seller's side: unearned revenue
  • The buyer's side: a prepaid expense

An advance payment is money a customer pays before the goods or services are provided, such as a deposit on a project or a retainer paid ahead of the work. It shows up on both sides of the deal. The seller has the cash but hasn't earned it yet, so it records unearned revenue, a liability. The buyer has paid but hasn't received the benefit yet, so it records a prepaid expense, an asset. As the work is delivered, the seller moves the amount to revenue and the buyer moves it to expense.

Billed publishes this page. The accounting definitions are quoted from the open textbook Principles of Accounting, Volume 1 (OpenStax), opened on October 30, 2026. This is general information, not accounting or tax advice; ask your accountant how to record advance payments in your books.

The seller's side: unearned revenue

OpenStax says: "Unearned revenue, also known as deferred revenue, is a customer's advance payment for a product or service that has yet to be provided by the company. Some common unearned revenue situations include subscription services, gift cards, advance ticket sales, lawyer retainer fees, and deposits for services."

It gives an example of a service business: "The customer's advance payment for landscaping is recognized in the Unearned Service Revenue account, which is a liability." For how the liability turns into revenue over time, see what is deferred revenue.

The buyer's side: a prepaid expense

OpenStax says prepaid expenses "are assets for which advanced payment has occurred, before the company can benefit from use. As soon as the asset has provided benefit to the company, the value of the asset used is transferred from the balance sheet to the income statement as an expense."

Deposits and retainers

Deposits and retainers are two forms of advance payment between businesses and their clients. Each has its own guide:

The terms of an advance, such as when it's due and whether any of it is refundable, belong in your agreement with the client. See legal payment terms for invoices, and ask a lawyer where needed.

When an employee pays first

The term "advance payment" is also used for an employee paying a business expense out of their own pocket and being paid back later. That's an expense reimbursement; see the guide to reimbursement policies. For small cash purchases, see petty cash management.

Sample: a three-month advance, recorded by both sides

The businesses and figures here are a sample, invented for this example.

On March 1, a client pays a bookkeeping firm $3,000.00 in advance for three months of bookkeeping, March through May, at $1,000.00 a month.

  • Seller, March 1: cash $3,000.00 and unearned revenue $3,000.00, a liability.
  • Seller, March 31: one month's work is done. $3,000.00 ÷ 3 = $1,000.00 moves to revenue, leaving $3,000.00 − $1,000.00 = $2,000.00 of unearned revenue.
  • Buyer, March 1: prepaid bookkeeping $3,000.00, an asset, and cash down $3,000.00.
  • Buyer, March 31: one month's benefit is used. $1,000.00 moves to expense, leaving $2,000.00 prepaid.
  • May 31: after three months, 3 × $1,000.00 = $3,000.00 has moved to revenue for the seller and to expense for the buyer, and both balances are $0.00.

The two sides mirror each other: at each month end, the seller's unearned revenue equals the buyer's prepaid balance.

Where Billed fits

Billed's recurring invoices page says: "Establish a stable cash flow with retainers." Its features page lists "Partially Paid Invoices" and says: "See partially paid invoices and send payment reminders to your customers." Its invoice software page says: "When a client pays by check or cash, record it as an offline payment so all your income is in one place." To take card payments, see accept payments and how to accept online payments. For tracking what you spend, see expense tracking for small business.

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Frequently Asked Questions

What is an advance payment?

Money a customer pays before the goods or services are provided. OpenStax describes unearned revenue as "a customer's advance payment for a product or service that has yet to be provided by the company."

Is an advance payment revenue for the seller?

Not yet. OpenStax describes the landscaping example's advance payment as recognized in an Unearned Service Revenue account, "which is a liability." It becomes revenue as the work is done.

How does the buyer record an advance payment?

As a prepaid expense, an asset. OpenStax says: "As soon as the asset has provided benefit to the company, the value of the asset used is transferred from the balance sheet to the income statement as an expense."

Is a deposit the same as an advance payment?

A deposit for services is one kind of advance payment; OpenStax lists "deposits for services" among its "common unearned revenue situations". The terms of a deposit depend on your agreement with the client.

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