Advance salary paid journal entry is Prepaid Salary Account Debit and Cash/Bank Account Credit. Prepaid salary is an current asset account. When a business pays an employee’s salary in advance, it creates a prepaid expense on the balance sheet. This payment is not yet an expense, but it is an asset since it represents a benefit that will be used in the future.
Example Scenario
Let’s assume a company pays an advance salary of ₹30,000 to an employee on 01-07-2024.
Journal Entry to Record Advance Salary Paid
| Date | Account Title | Debit (INR) | Credit (INR) |
|---|---|---|---|
| 01-07-2024 | Prepaid Salary | 30,000 | |
| 01-07-2024 | To Cash/Bank | 30,000 |
Explanation:
- Prepaid Salary Account Debit: Increases the prepaid salary account, and recognizing the advance payment as a future benefit.
- Cash/Bank Account Credit: Decreases the cash/bank account, because of reflecting the outflow of cash/bank balances for the advance payment.
Journal Entry When Salary is Earned
When the employee earns the salary, the advance payment needs to be adjusted.
Example Scenario
Let’s assume the advance salary was for the month of July 2024, and the salary is earned by the end of the month.
Journal Entry to Adjust Advance Salary
| Date | Account Title | Debit (INR) | Credit (INR) |
|---|---|---|---|
| 31-07-2024 | Salary Expense | 30,000 | |
| 31-07-2024 | To Prepaid Salary | 30,000 |
Explanation:
- Salary Expense Account Debit: Increases the salary expense account, and recognizing the expense for that month.
- Prepaid Salary Account Credit: Decreases the prepaid salary account, and adjusting the advance payment to reflect the earned salary.
Summary
- Advance Salary Payment:
- Prepaid Salary (Debit): Recognizes the advance payment as a future benefit.
- To Cash (Credit): Reflects the outflow of cash.
- Salary Earned:
- Salary Expense (Debit): Recognizes the salary expense.
- To Prepaid Salary (Credit): Adjusts the advance payment to reflect the earned salary.
Recording advance salary payments accurately and ensuring the financial statements provide a true and fair view of the company’s financial position and performance, adhering to the accrual basis of accounting.