Accounting for advances to employees and officers
April 8, 2012
Learn about accounting for advances to employees and officers with real-life examples and journal entries.
Advance to employee or officer (employee advance) represents a cash payment (loan) made by the employer for the business expenses that are anticipated to be incurred by the employee or officer on behalf of the employer; and the employee is obligated to prove business expenses to the employer. Examples of advances to employees and officers might include the following: for travel (e.g., gas, parking, tickets, lodging), meals, entertainment, professional association memberships, certifications, etc.
Because the company expects to be paid back by the employee and the payback period is normally less than a year, the company usually treats an advance to the employee as a current asset. Hence, advances to employees and officers can be found in the current assets section on the balance sheet. Advances to employees can be listed on the balance sheet as Employee Advances, Other Assets, or Other Receivables.
Companies usually establish an accountable plan for employee advances. The plan represents an agreement to reimburse the employee for incurred business expenses if the employee meets certain requirements such as:
- Incurs expenses while on company business (i.e., expenses for the business while performing services as the employee – not personal expenses).
- Incurs expenses that qualify as deductible business expenses (e.g., car, travel, meal, entertainment).
- Reports business expenses within a reasonable period of time.
- Submits an expense report along with receipts to substantiate the expenses.
Payments made to an employee for business expenses that to do not comply with an accountable plan are considered to be made under an unaccountable plan. Such payments represent wages to the employee.
Similarly, when an employee is reimbursed in excess of the actual expenses incurred by the employee, such payments are considered taxable wages for the employee. In such a case, the employer is required to pay payroll tax on these payments (unless the employee returns the excess payment to the employer within a reasonable time).
Employee advances are different from employee allowances and reimbursements.
Employee allowance represents a cash payment (loan) made by the employer for the business expenses that are anticipated to be incurred by the employee or officer on behalf of the employer; and the employee is NOT obligated to prove business expenses to the employer.
In the case of an employee allowance, a company establishes a set amount each month to cover employee expenses while on company business. The allowance is considered to be income to the employee. The employee doesn’t have to report his or her expenses to the employer. If the employee expenses exceed the allowance, the employee will not receive additional funds from the company.
Reimbursement for employee expenses occurs when an employee incurs business-related expenses on behalf of an employer and pays for them out of his or her pocket.
In other words, the employer doesn’t establish an advance or allowance for the employee. Reimbursement doesn’t represent income to the employee. In this case, employers usually use the direct reimbursement method (i.e., dollar-for-dollar).