What Is an Advance Payment?
Advance payment is a type of payment made ahead of its normal schedule, for example, paying for a decent or service before you actually receive it. Advance payments are in some cases required by sellers as protection against nonpayment, or to cover the seller's out-of-pocket costs for providing the service or product.
There are many cases where advance payments are required. Consumers with [bad credit](/terrible credit) might be required to pay companies in advance, and insurance companies generally require an advance payment to stretch out coverage to the insured party.
Grasping Advance Payments
Advance payments are amounts paid before a decent or service is actually received. The balance that is owed, if any, is paid whenever delivery is made. These types of payments are as opposed to deferred payments — or payments financially past due. In these cases, goods or services are delivered first, then paid for some other time. For instance, an employee who is paid toward the finish of every month for that month's work would get a deferred payment.
Advance payments are recorded as assets on a company's balance sheet. As these assets are utilized, they are exhausted and recorded on the income statement for the period in which they are incurred.
Advance payments are generally made in two circumstances. They can be applied to a sum of money gave before a contractually settled upon due date, or they might be required before the receipt of the mentioned goods or services.
Advance Payment Guarantees
An advance payment guarantee fills in as a form of insurance, guaranteeing the buyer that, should the seller fail to meet the settled upon obligation of goods or services, the advance payment amount will be refunded to the buyer. This protection permits the buyer to consider a contract void in the event that the seller fails to perform, reaffirming the buyer's rights to the initial funds paid.
States additionally issue advance payments to taxpayers like Social Security.
Special Considerations: Advance Payments to Suppliers
In the corporate world, companies often need to make advance payments to providers when their orders are sufficiently large to be difficult to the producer. This is especially true assuming the buyer chooses to pull out of the deal before delivery.
Advance payments can help producers who need more capital to buy the materials to satisfy a large order, as they can utilize part of the money to pay for the product they will make. It can likewise be utilized as an assurance that a certain amount of revenue will be brought in by delivering the large order. In the event that a corporation is required to make an advance payment, it is recorded as a prepaid expense on the balance sheet under the accrual accounting method.
Instances of Advance Payments
There are numerous instances of advance payments in reality. Take prepaid cell telephones, for instance. Service suppliers require payment for cell services that will be involved by the customer one month in advance. In the event that the advance payment isn't received, the service won't be given. Similar applies to payments for impending rent or utilities before they are contractually due.
One more model applies to eligible U.S. taxpayers who received advance payments through the Premium Tax Credit (PTC) offered as part of the Affordable Care Act (ACA). The financial assistance helps residents, that meet household income requirements, pay for their medical coverage. The money due to the taxpayer is paid to the insurance company in advance of the actual due date for the credit.
The American Rescue Plan, endorsed by President Biden on March 11, 2021, rolled out certain improvements to the ACA Premium Tax Credit. All taxpayers with insurance bought on the Marketplace are presently eligible for this credit in 2021 and 2022; beforehand, filers were ineligible assuming their income surpassed 400% of the federal poverty line.
Consumers with awful credit may likewise be required to furnish creditors with advance payments before they can purchase goods or services.
- Advance payments are made before getting a decent or service.
- A prepaid cell telephone is an illustration of an advance payment.
- Generally speaking, advance payments safeguard the seller against nonpayment in case the buyer doesn't come and pay at the hour of delivery.
- Companies record advance payments as assets on their balance sheets.