Definition of Advance to an Employee
A cash advance to an employee is usually a temporary loan by a company to an employee. In other words, the company is the lender and the employee is the borrower.
The cash advance needs to be reported as a reduction in the company’s Cash account and an increase in an asset account such as Advance to Employees or Other Receivables: Advances. (If the amount is expected to be repaid within one year, this account will be reported as a current asset.)
If the cash advance is repaid through payroll withholdings, the routine payroll entry will record the amount withheld as a credit to Advance to Employees. This in turn results in a smaller amount being credited to Net Payroll Payable.
Example of Advance to an Employee
Let’s assume that a valuable employee’s car requires an emergency repair of $800. The employee is unable to pay for the repair and has no other means for getting to work. The company agrees to lend the employee $800 and to withhold $100 per week from the employee’s weekly payroll checks until the $800 is repaid.
The company will debit the current asset Advance to Employees for $800 and will credit Cash for $800. The weekly payroll processing will result in a credit of $100 to Advance to Employees (thereby reducing by $100 the amount credited to Net Payroll Payable).
