Invoice software for Ireland

Advance Invoice in Ireland

An advance invoice is issued when the customer is required to pay before goods are delivered or before the performance of services. Depending on the policy and understanding, the payment request via the advance invoice can be partial or full. There are also different forms of an advance invoice which include the following:

advance invoice example

When is an Advance Invoice Used?

An advance invoice is generally used in the following situations:

Profiles of Companies Where an Advance Invoice is Used

As has been discussed, the use of advance invoices can be highly effective in certain situations. However, there are both advantages as well as disadvantages of using advance invoices which will now be discussed.

Advantages of an Advance Invoice

Following are some advantages related to the use of advance invoices:

Disadvantages of an Advance Invoice

Following are three disadvantages of advance invoices:

It is important to note that an advance invoice is an opposite version of an invoice in arrears. In arrears, the customer is required to pay once the goods have been delivered or the services have been performed. An arrears invoice, creates a receivable in the financial statement, which is an asset. This is contrasted to an advance invoice as it creates unearned revenue or deferred income, which is recorded as a liability in the financial statement of the business.

How to Create an Advance Invoice

Accounting for an Advance Invoice

Now we shall discuss the detailed aspects of accounting for payment and receipt of an advance invoice.

Accounting for an advance invoice is different from a customer and supplier perspective. Both these situations will now be discussed.

Journal Entry for Invoice Received in Advance (Customer Perspective)

The following journal entry is posted in the accounting books when the customer pays an advance invoice:

Details Debit Credit
Advance/deposit XXX  
Cash   XXX

The debit impact of the transaction creates an asset in the financial statement because the customer has not realized the economic benefit of this payment. On the other side of the transaction, the credit impact reduces cash from the books as it has been paid.

Once goods are delivered, the following entry is posted in the books:

Details Debit Credit
Goods/Inventory XXX  
Advance/deposit   XXX

The debit impact of this transaction is that goods are recorded in the books as the goods have been received. On the other hand, the credit impact removes the deposit or advance, which was recorded in the previous journal entry. The reason for the removal of the deposit or advance is that the economic benefit in the form of goods has been realized. This means that there is no need to keep the deposit or the advance in the books of accounts.

Journal Entry for an Invoice Issued in Advance (Supplier Perspective)

The following journal entry is posted it the accounting books when the supplier gets paid against the advance invoice:

Details Debit Credit
Cash XXX  
Unearned revenue   XXX

The debit impact of this transaction is to record the cash receipts. On the other hand, the credit impact is the recording of a liability as the business has entered into an obligation to fulfil certain commitments.

Once the commitment of the delivery of goods or performance of services, has been fulfilled, the following entry is recorded:

Details Debit Credit
Unearned revenue XXX  
Revenue   XXX

The debit impact of this transaction is to remove the liability or obligation. This is because the business has fulfilled its commitment to deliver economic benefits. On the other side of the transaction, the credit impact is the recording of revenue under normal accounting procedures.

It is of particular importance to not confuse the advance invoice with a proforma invoice. The following table will outline the difference between the two.

Difference Between an Advance Invoice and a Proforma Invoice

Advance invoice Proforma invoice
An advance invoice is a requirement to pay. It creates a demand to pay before goods are received or services are performed. A Proforma invoice is not a requirement to pay. Instead, it is just a proposal that aims to build a sales contract between the seller and customer.
An advance invoice is expected to positively contribute to the working capital management of the seller. Proforma invoice does not have any impact on working capital management.
An advance invoice acts as a source document to post transactions in the accounting system. For instance, funds received from customers are debited, and unearned revenue is credited to the accounting system. No updates are required in the accounting system for proforma invoices.
Usually, an advance invoice is issued when terms and conditions have already been agreed between the seller and buyer. The customer has the option to negotiate the terms and conditions mentioned in the proforma invoice. They may accept, request some changes, or reject completely.

Can a Business Receive a Full Advance Payment?

Yes, a business will be able to receive a full advance payment using an advance invoice. This will depend on the business understanding between the seller and the buyer.

Conclusion

An advance invoice is issued by the seller when the customer is requested to pay before the goods or services are delivered to them. Depending on the understanding and business terms between the seller and buyer, the advance invoice can be used to request partial or full payment.

An advance invoice is generally used when there is a higher risk of non-payment by the buyer, the stock sold is highly specialized and bespoken, the upfront cost to manufacture the goods is higher, when the business model is based on recurring revenue or there is an extensive length of trade process. As highlighted above, General Contractors, Inv24 and Air Bus are profiles of companies that use advance invoices as part of their business operation.

The advantages of using advance invoices include, a significant reduction in the risk of non-payment as the selling business has collected the funds before fulfilling the commitment and higher efficiency in working capital as there is little or no need to raise short-term time finance once the business receives that advance payment. In addition, there is optimization of administrative resources as the seller does not have to follow up for collection of funds. Simplified automation and an ease in setting a budget are also advantages as the terms are clear from the start.

In addition to the advantages of using an advance invoice, there are certain limitations involved also. This includes higher customer uncertainty about the quality and delivery of goods. This is because the customer has already paid for the goods before inspection. From the seller’s perspective, it can be difficult for them to collect additional charges if they need to because customers may not want a second invoice for additional charges once they have already paid. Another disadvantage is that it is difficult for the seller to issue a refund in the case of when the buyer cancels an order.

Accounting for an advance invoice is straightforward. From the customer’s perspective, the payment made is an asset and is adjusted when the seller fulfills their commitment. From the seller’s point of view, the advance received is a liability and is adjusted when the obligation is fulfilled.

It is important to note that a proforma invoice is different from an advance invoice. For instance, an advance invoice is used to request payment before the work has been performed or goods have been delivered. The payment received is accounted for in the accounting books. On the other hand a proforma invoice is an estimate only and is sent with the intention to communicate terms and conditions of the sales contract that may be agreed upon.

Frequently Asked Questions

How is the advance payment received reported in the financial statement of the business?

An advance payment received is reported as a liability in the financial statement of the business. This account balance for liability is called unearned revenue or deferred revenue. Once the work is performed, the liability is removed and revenue is recorded in the financial statement of the business.

What is the impact of an advance invoice on working capital management?

There is a positive impact of an advance invoice on working capital management. The amount received from advance payments from customers can be used to pay suppliers, contractors, vendors and so forth. In this case, there is little or no need or pressure to raise short-term finance, which is an expensive source of working capital.

What is the different between an invoice in advance and an invoice in arrears?

Invoice in advance is when the customer is required to make payment before the goods are delivered. On the other hand, invoice in arrears is when a customer is required to make payment after goods have been delivered to them.

Is there any risk associated with an advance invoice?

The prime risk associated with an advance invoice is that the seller may fail to fulfill their commitment and may not be able to deliver quality goods as promised.

Is deferred income the same as advance payment received from the customer?

Yes, deferred income is the same as advance payment received from the customer. It is recorded as a liability and is adjusted when the obligation is fulfilled.


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