what is an advance payment 
advance payment is a type of payment made ahead of its normal schedule such as paying for a good or service before you actually receive it advance payments are sometimes required by sellers as protection against nonpayment or to cover the seller s out of pocket costs for supplying the service or product there are many cases where advance payments are required consumers with bad credit may be required to pay companies in advance and insurance companies generally require an advance payment in order to extend coverage to the insured party understanding advance paymentsadvance payments are amounts paid before a good or service is actually received the balance that is owed if any is paid once delivery is made these types of payments are in contrast to deferred payments or payments in arrears in these cases goods or services are delivered first then paid for later for example an employee who is paid at the end of each month for that month s work would be receiving a deferred payment advance payments are recorded as assets on a company s balance sheet as these assets are used they are expended and recorded on the income statement for the period in which they are incurred advance payments are generally made in two situations they can be applied to a sum of money provided before a contractually agreed upon due date or they may be required before the receipt of the requested goods or services advance payment guaranteesan advance payment guarantee serves as a form of insurance assuring the buyer that should the seller fail to meet the agreed upon obligation of goods or services the advance payment amount will be refunded to the buyer this protection allows the buyer to consider a contract void if the seller fails to perform reaffirming the buyer s rights to the initial funds paid governments also issue advance payments to taxpayers like social security 1special considerations advance payments to suppliersin the corporate world companies often have to make advance payments to suppliers when their orders are large enough to be burdensome to the producer this is especially true if the buyer decides to back out of the deal before delivery 2advance payments can assist producers who do not have enough capital to buy the materials to fulfill a large order as they can use part of the money to pay for the product they will be creating it can also be used as an assurance that a certain amount of revenue will be brought in by producing the large order if a corporation is required to make an advance payment it is recorded as a prepaid expense on the balance sheet under the accrual accounting method examples of advance paymentsthere are many examples of advance payments in the real world take prepaid cell phones for example service providers require payment for cell services that will be used by the customer one month in advance if the advance payment is not received the service will not be provided the same applies to payments for upcoming rent or utilities before they are contractually due another example applies to eligible u s taxpayers who received advance payments through the premium tax credit ptc offered as part of the affordable care act aca the financial assistance helps citizens that meet household income requirements pay for their health insurance 3 the money due to the taxpayer is paid to the insurance company in advance of the actual due date for the credit 4the american rescue plan signed by president biden on march 11 2021 made some changes to the aca premium tax credit 4 all taxpayers with insurance bought on the marketplace are now eligible for this credit in 2021 and 2022 previously filers were ineligible if their income exceeded 400 of the federal poverty line 5consumers with bad credit may also be required to provide creditors with advance payments before they can purchase goods or services 6