Question

What is different between advance payment and prepaid expense? and give an example!

Answer 1

Prepaid expenses.

Prepaid expenses are amounts paid in advance such as an insurance premium paid at the beginning of a policy period for insurance coverage to be received during the portion of the future policy period that will occur during the coming operating cycle. Prepaid expenses are not convertible to cash, but they are classified as current assets because they would have required the use of current assets during the coming operating cycle if the expenses had not been prepaid. These expenses are expenses incurred because of payments that have been made in advance. Though expenses are usually recorded as a liability in the balance sheet but these expenses are a slight deviations from the theory because of the tprivileges can be incurred in the future. An example for prepaid expense is an insurance premium. These expenses are always recorded in the current asset of the balance sheet. Therefore when the insurance premium is paid in full at the beginning of the insurance coverage the prepaid expense account for insurance is debited and the cash account is credited in the balance sheet . Other examples are advance payment of rent and tax paid in advance.

Advance payments

A payment made ahead of its normal schedule , that is paying for a good or service without receiving is advance payments. Advance payments are some times required as a protection for sellers against non payment and meet the sellers out of pocket costs for supplying the product or service. In many situations there are advance payments required. Companys may ask advance payments for customers who have bad credit. Insuarnce comapnies also generally require an advance payment in order to extend coverage to the insured party. Companys record advance payments as assets on their balance sheets. A prepaid cell phone is an example of an advance payment. These type of payments are in contrast to deferred payments or payment in arrers. An advance payment, or simply an advance, is the part of a contractually due sum that is paid or received in advance for goods or services, while the balance included in the invoice will only follow the delivery.