Accounting for advances to employees and officers

2. Accounting for advances to employees and officers

Advances may be provided to an employee regularly (i.e., monthly to employees who travel a lot) or on as needed basis (i.e., once in a while for employees who attend a conference). Depending on the frequency of advances there may be a few ways to account for them.

2.1. Accounting for regular advances to employees

When a company sets a predetermined amount to cover employee’s business expenses each month, the accounting for employee advances is similar to the accounting for petty cash.

For example, at the beginning of each month Company ABC advances $1,000 to its sales manager, John Smith, for travel-related expenses. To record the employee advance, the company makes the following journal entry (this entry is posted once at the time the first advance is made):

Account Titles

Debit

Credit

Employee Advances – John Smith

1,000

 

      Cash

 

1,000

At the end of the month, John Smith turns in his expense report along with the original receipts. Let’s assume that in June 20X2 John Smith incurred $1,000 of travel-related expenses: $600 mileage, $100 miscellaneous expenses, and $300 meals. He provided the expense report with the required receipts. The company makes the following journal entry to record the travel expenses as well as next month replenishment advance to John:

Account Titles

Debit

Credit

Auto Expenses

600

 

Miscellaneous Expenses

100

 

Meals Expenses

300

 

      Cash

 

1,000

As we can see, the company doesn’t make any changes to the Employee Advances account. This is convenient because advances are provided monthly, so there is really no need to adjust the Employee Advances account unless there is a change in the monthly advance amount.

In situations when John’s expenses are (a) less or (b) more than the monthly advance amount of $1,000, (a) John would submit an expense report for less than $1,000 and receive a replenishment for the amount of expenses submitted, or (b) John would receive a reimbursement from the company for the excess of his travel expenses over the advance amount of $1,000. For example, assume that John’s expenses for July 20X2 are as follows: $300 mileage, $150 miscellaneous expenses, and $300 meals. The company makes the following journal entry:

Account Titles

Debit

Credit

Auto Expenses

300

 

Miscellaneous Expenses

150

 

Meals Expenses

300

 

      Cash

 

750

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