What is Advance payment?
Advance payment is a broad term that refers to any funds received by a business prior to the provision of a good or service. It protects both businesses and customers in the event of nonpayment or non-delivery. It can be used in a wide range of industries and situations.
Advance payment enables the company to improve cash flow, manage capacity levels, and ensure that full payment is received upon completion. It can be used as a standard for all business transactions or for specific cases.
A buyer makes an advance payment to the seller before the goods and services are delivered. It protects the seller from the risk of future nonpayment. It can also assist the seller in financially producing, procuring, or rendering the goods or services. It appears as a prepaid expense for the buyer on the asset side of the balance sheet. Such advances are typically required when a buyer has previously defaulted on payments, protecting the sellers from such unforeseeable events.
A prepaid cell phone is an example of a prepayment. To enjoy the benefits of a prepaid cell phone for one month, the customer must pay for it in advance. When prepayments are received, the service provider only provides service for one month. Prepaid rent or utilities are another example.
Another notable example is American taxpayers who receive advance payments from the premium tax credit (PTC). It assists citizens with household chores and other tasks. The taxpayer pays the insurance company in advance.