Cash advance
Money given to an employee before a trip or purchase, to be accounted for later with receipts and any unspent amount returned.
In short
- An advance is not an expense when paid. It is money the employee owes back until receipts replace it.
- It helps employees who cannot or should not carry costs on a personal card.
- Advances that are never settled are a common source of leakage and, in some jurisdictions, taxable income.
A cash advance is paid to an employee ahead of spending: before a trade show, a field trip or a remote site visit where a company card will not work. It is recorded as a receivable from the employee, not as an expense, because the company does not yet know what the money will be spent on.
Settling an advance
After the trip, the employee submits an expense report with receipts. The approved expenses are set against the advance. If they spent less, they return the difference; if they spent more, the company reimburses the excess. Only at that point do the expenses hit the books under the right categories.
Why advances need tracking
Advances are easy to hand out and easy to forget. An open advance is money the company has paid with nothing to show for it, and after enough months it quietly becomes a write-off. Good practice is to set a deadline for settling, block new advances while an old one is open, and review open balances at every month end.
For tax, an advance that is properly accounted for is not income to the employee. One that is never settled can end up treated as a taxable benefit or, under US accountable plan rules, as wages.
Many companies have moved away from cash advances toward company cards, which record each purchase as it happens.
Worked example
A site visit up north
A technician receives a $600 advance for a four-day visit to a remote mine site. They submit receipts for $512.40: fuel, meals and a motel night. The company records $512.40 of travel expenses and the technician returns $87.60. The receivable of $600 is cleared to zero.