Advance payment to suppliers, how is it accounted for?

The advances to suppliers are commonplace in the world of SMEs, a requirement of some suppliers that they be able to small enterprises What exactly does advance payment to suppliers consist of? What are the main features we should know about this advance payment? How should we to record in our accounting books this payment in advance? All the answers to these and other interesting questions in today's article.

What is the advance payment to suppliers?

The advance payment to suppliers consists, simply, in adelaying payment of the invoice for an order (of a good or service) requested by a company from its supplier. This formula is quite common among the self-employed and small businesses, as they do not have sufficient power to negotiate other payment formulas with their suppliers that might be more advantageous and that would allow them to reduce daily expenses generated by its activity.

Advance payment for a future order is not an unusual or harmful practice, but we do need to know some details on this form of advance payment, accounting details that will allow us to correctly record this expenditure under the appropriate accounting heading according to the General Chart of Accounts.

Characteristics of advances to suppliers

It notes, then, the main features of the advance payment to suppliers:

• Advance payments to suppliers can be in whole or in part.
• If payment of the order in advance is in full, we will pay the supplier the TOTAL AMOUNT of the corresponding invoice including input VAT.
• If we negotiate well or if we have been working with the same company for a long time, our supplier may allow us to move forward only a part of the final bill. In this case, the amount paid in advance will be deducted from the final invoice.
• In both cases (full or partial advance payment to suppliers) the advance payment invoices shall include VAT.
• The advance we are making is part of the assets of our company and must be recorded as such in our accounting records. According to the chart of accounts, the crediting of the advance order shall be recorded in the account 407. When we receive the goods that we have paid for in advance, we will move this amount from account 407 to the account number 600.

Advance payments to suppliers in the General Chart of Accounts

SMEs that do not have in-house or external advisors to take care of accounting often face problems when it comes to to record the advance payment to suppliers in its chart of accounts or PGC. We will try to clarify this type of question as simply as possible by looking at how advance payments to suppliers are accounted for in the company's balance sheet:

How advance payments to suppliers are accounted for and what happens with VAT

According to the General Accounting Plan, the account to be used to record this advance to suppliers is the following 407, within subgroup number 57 and under the heading “Stocks”. What about VAT on advances to suppliers?

It is not a complex issue at all. The only thing you need to remember is that you need to register the Input VAT of this advance payment. This tax is booked in the account 472 of the PGC.

What is the accounting entry of the advance payment to suppliers: a practical example?

A practical exampleImagine you have a small carpentry shop and your supplier of wooden strips asks you to pay in advance the full amount of your next order, which amounts to 1000 euros + 21 % VAT. You pay the invoice (total amount + VAT) by depositing the money into the banking institution your timber supplier.

Against this background, the accounting entry to record the pre-order transaction would be as follows:

A full summary of the entry in our books of account would be as follows:

As you can see, understanding and correctly recording this accounting figure, which is the advance to suppliers is not as complicated as it might seem at first glance. However, our advice for SMEs and entrepreneurs is always the same: to avoid accounting problems, it is best to rely on the services of a good in-house or external advisor or to use an simple accounting software that allows you to automate this type of task.