Accounting principle for Cash advances

The illustration shows the accounting flow for the disbursement and settlement of a cash advance to an employee (Peter).

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Step 1: Advance Registration (Disbursement)

In the first step, 1,000.00 DKK is paid out in cash to Peter.

• Physical action: Peter receives 1,000 DKK in cash.
• Accounting:
  • Debit: Balance: Advance clearing account (1,000.00 DKK) – the company has a receivable from Peter.
  • Credit: Operations: Currency cash account (1,000.00 DKK) – the money is taken out of the company’s cash register.
• Financial path: EXPORT ➔ READY FOR EXPORT ➔ ADVANCE

Step 2: Employee Registration & Use of Advance (Settlement)

In the second step, the advance is settled in the accounting system after Peter has used part of the money and submitted his receipts.

1. Resetting the advance account and transfer to employee account

The advance clearing account is closed and approved in finance/flow:

• Debit: Creditor/Clearing: Peter’s account (1,000.00 DKK).
• Credit: Balance: Advance clearing account (1,000.00 DKK) – the receivable on the clearing account is offset.

2. Posting of actual expenses (Use of advance)

Peter has used a total of 700.00 DKK (400.00 DKK on taxi and 300.00 DKK on meals):

• Debit: Operations: Taxi (400.00 DKK).
• Debit: Operations: Meals (300.00 DKK).
• Credit: Creditor/Clearing: Peter’s account (400.00 DKK and 300.00 DKK) – expenses are offset against Peter’s account.
• Financial path: EXPORT ➔ READY FOR EXPORT ➔ EXPENSES

Overall Status / Conclusion

After both steps, Peter’s account looks as follows:

• Disbursed advance (Debit): 1,000.00 DKK
• Posted expenses (Credit): 700.00 DKK (400.00 DKK + 300.00 DKK)
• Balance: Peter still has 200.00 DKK in cash, which he must either return to the cash register or settle with future receipts.

Related articles:

• How to set up an employee advance clearing account
• How to set up a currency cash account