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Salary paid in advance
The term salary paid in advance is also known as prepaid salary. salary paid in advance is initially recorded as an asset because it provides some future economic benefit and is charged at the time when the actual benefit is realized in the succeeding accounting period.
The amount of Prepaid salary is deducted from salary and shown on the debit side of the profit and loss account. It is further shown under the head current asset in the balance sheet. Hence prepaid salary (or) salary paid in advance is treated as adjustment entry.
Example- On 1st March, Company A Ltd paid 4 months prepaid salary amounting to 40,000 (10,000*4) to the employees of the company. Evaluate the treatment of the amount paid as prepaid salary by the company to the employees. Journalise the following transaction by recording payment and adjustment entry.
- Traditional Accounting Approach
Journal Entry in the books of Company A
| Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
| March 1st | Prepaid Salary a/c Dr | 40,000 | Representative Personal | Debit– The receiver | |
| To Cash/Bank a/c | 40,000 | Real | Credit– What goes out of the business |
(Being the payment for prepaid salary made)
| Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
| Aug 3rd | Salary a/c Dr | 10,000 | Nominal | Debt– All Expenses and Losses | |
| To Prepaid Salary a/c | 10,000 | Representative Personal | Credit– The Giver |
(Being the amount of prepaid salary adjusted to salary)
- Modern Accounting Approach-
We will record the same transaction by following the modern rules of accounting (widely recognized and followed all over the world).
Journal Entry in the books of Company A
| Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
| March 1st | Prepaid Salary a/c Dr | 40,000 | Asset | Debit– The Increase in Asset | |
| To Cash/Bank a/c | 40,000 | Asset | Credit– The Decrease in Asset |
(Being the payment for prepaid salary made)
| Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
| Aug 3rd | Salary a/c Dr | 10,000 | Expense | Debit– The Increase in Expense | |
| To Prepaid Salary a/c | 10,000 | Asset | Credit– The Decrease in Asset |
(Being the amount of prepaid salary adjusted to salary)
