AR – Advance From Customers

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Right. So, the scenario is advance received from customers. The normal entry, whenever we make any sale, customer account is debited and sundry debtors account also debited. So, customer account returned to sales. So already we have seen that we have established the link between customer account and sundry detached account. Because, any amount that is posted to any customer that will be reflected in these sundry debtors account, that will be reflected in the balance sheet. Now when amount is received, what we do, bank account is debited and customer account is credited. So, bank account returned to customer. So, by default, whenever we post an entry to customer, it will be posted even to sundry debtors. That is normal entry. Now in case of advance, the case is first, we don’t make any sale, first, we receive amount from customer and then sale is made, but entries are not same. The reason is whenever we receive any advance from customer, that is a liability for us. That’s why you should not enter entry like bank account data to customer. That’ll give you a wrong meaning and a wrong representation of your financial accounts because there may be a gap between the advance received from the customer and goods supplied to customer. In case of automobile industry, even now, if you are going to take some of the branded premium cars, see, generally, like a Mercedes Benz, something like these cars, if you want to buy immediately, I think you may have to wait for some time. So, you have to pay advance, then subsequently, we receive the car. Like that in some of the premium products, first, we have to pay the advance. But the advance, whatever we receive as a company, there is a liability for us. So that’s why when advance is received from customer, bank account return to customer account and whenever we receive advance, how system is going to know that we have received advance or we have received after the sale? There is no indication. But, now we are going to do whenever we receive any advance, we tell to the system, bank account data ‘A’. A is nothing but this is a special GL indicator. So whenever we receive any payment in advance, we at the time of receipt, we put ‘A’ there. So, A means advance, and whenever we receive in advance, when amount is received, generally, bank account return to customer account. See here, bank account data to customer account, it will post to sundry debtors. But in this case, if advance is received bank account data to customer, that’s okay. But the recon account is not sundry debtors, rather advanced from customers account we want. Advanced from customers account is a recon account. Of course, it’s a GL account but a recon account. So, you know, recon account is nothing but recon account is an account which is an amount to be posted to that recon account only through sub ledger. In our case, that is customer accounts. Any entry that should be posted to Sundry debtors should be routed through customers account. So now what we are going to do is we are going to map. Right. Whenever customer account is posted, already by default we have already given this.

Now, what I want, I am telling to the system, now if A is given, don’t post to sundry debtors account, post to advance from customers account. So, for this, we need to do a small configuration. We have to do it. Right? Then system will post to advance from customers. Whenever I post A, it will by default it will go through A, it will come to advance from customers account. How we’ll do it, I’ll show you. And the advance from customers account is also a recon account. Sundry debtors as you know is a recon account. So, what is a recon account? Recon account is nothing but any entry to the recon account will be routed only through customers or vendors, something like that. You cannot post an entry directly to that. There is a link established between the customer and the recon account. So, all those accounts are called reconciliation accounts. Even advanced from customers is also a recon account. And because we may be receiving advance from different 100 customers, I think, or 10 customers. So, in such case, advance from customers account is also just like sundry debtors. But sundry debtors is a current asset, but this is a liability. So, when advance is received from customer, bank account return to customer account. But now we’ll map different account, not standard accounts here, advance from customer’s account. When sale is made, so once you receive advance, it is the liability on the part of the company to supply goods to him. So, customer account return to sales. Now, in this case, we are not using AR or anything. When you make sale, customer account is debited to sales. In such case, by default, it will go to sundry debtors account. So now advance is lying in advance from customer’s account and, sales, whenever you make the sale that is lying in the sundry debtors account, so ‘S. DRS A/C’ is showing debit balance and ‘ADV FM Customers A/C’ is showing credit balance.

Now from customer perspective, from customer point of view, then his job is over, he has paid me advance and, we have supplied goods to him. There is a matter. But as an accountant, I need to transfer the balance from advanced from customer’s account to sundry debtors account. Otherwise, sundry debtors account will continue to show debit balance, that means as if we are yet to receive payment from customer, it will show like that. So, for that purpose, what we need to do? My third step, transfer the balance from advanced from customers account to sundry debtors account. That is from special GL to normal GL. Because we are using special GL indicator and normal GL is nothing but normal GL, sundry debtors account. So, we have to transfer the balance from advanced from customers account to sundry debtors account so that sundry debtors account will be closed. Otherwise, it’ll continue to show as if amount has not been received. And, this is when you do that, what is the accounting entry? Looks like something peculiar. Customer account return to customer account. But here, advance from customers account is debited, sundry debtors is credited. This entry, I’ll show you once I post in the system. Why we are going to do customer account debit, customer account credit, how come, what is the necessity of debiting and crediting.