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Ajay Mady

What is the journal entry for salary paid in advance?

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1 Answer

  1. This answer was edited.

    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 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).

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