Advance from customer definition

What is an Advance from Customer?

Advance from customer is a liability account, in which is stored all payments from customers for goods or services that have not yet been delivered. Once the related goods or services have been delivered, the amount in this account is shifted to a revenue account. Thus, the initial entry is a debit to the cash account and a credit to the advance from customer account. Once the related goods or services have been provided to the customer, the seller records a debit to the advance from customer account, and a credit to the sales account.

Characteristics of the Advance from Customer Account

The primary characteristics of the advance from customer account are as follows:

• Nature of the account. It is classified as a current liability on the balance sheet since the company has an obligation to either deliver goods/services or refund the advance.

• Recognition of obligation. It represents a contractual obligation to fulfill a customer agreement.

• Impact on the financial statements. It appears as a liability on the balance sheet, and has no immediate impact on the income statement.

• Underlying risk. It may imply the presence of risk if the company fails to deliver, leading to potential refunds or disputes.

Presentation of the Advance from Customer Account

The advance from customer account is typically considered a short-term liability account, since the amounts stored in it are usually settled within 12 months. If advances are not expected to be settled within this period of time, then they are instead classified as long-term liabilities.