If the customer makes an advance payment before the contractual partner has rendered the contractually agreed performance, the payee must recognise this amount at its nominal value as a liability under the balance sheet item "advance payments received on orders" in a manner that does not affect profit or loss. Derecognition is only possible at the point in time when the payee has realised a receivable.
An exception applies to advance payments received on inventories: these may alternatively be deducted openly from inventory assets on the balance sheet, resulting in a reduction of the balance sheet total.
In principle, VAT on supplies of goods and other services arises — under the system of taxation based on agreed consideration — at the end of the preliminary return period in which the services were rendered. However, if the advance payment is received before the service is rendered, VAT arises at the end of the preliminary return period in which the consideration was received.
Due to the obligation to recognise the advance payment as a liability in full, i.e. without deducting VAT, the VAT must be treated as an expense for which a prepaid expense item (aktiver Rechnungsabgrenzungsposten) must be recognised in the tax balance sheet at the balance sheet date. This item is reversed without affecting profit or loss once the underlying transaction has been performed and the advance payment is offset against the receivable to be recognised as an asset.
Under commercial law, there is no such mandatory recognition requirement. For this reason, the net amount of the liability is to be reported under "advance payments received on orders" in the commercial balance sheet, and the VAT is to be recognised under other liabilities until it is paid to the tax authorities.
Example: On 12 March 2019, the entrepreneur receives an advance payment of €35,700 from the customer. The contractually agreed delivery does not take place until 28 March 2019. The total invoice amount is €50,000 plus 19% VAT. The customer transfers the remaining amount without cash discount on 10 April 2019.
At the end of the month (31 March 2019), this results in a VAT liability of €9,500 (€9,500 + €5,700 – €5,700) and a remaining receivable of €23,800 (€59,500 – €35,700).
Source: www.nwb.de, technical information "advance payments received"
Frequently asked questions
Frequently asked questions
How must advance payments received be reported on the balance sheet?
Advance payments received must be recognized by the recipient at their nominal value as a liability under the balance sheet item 'advance payments received on orders', with no impact on profit or loss. They may only be derecognized once the recipient has realized a receivable, i.e., once the contractually owed performance has been rendered. As an alternative for advance payments on inventories, these may be openly deducted from inventory assets (balance sheet contraction).
When does VAT arise on advance payments received?
Under accrual-based VAT taxation (Besteuerung nach vereinbarten Entgelten), VAT generally arises at the end of the pre-registration period in which the supply was rendered. However, if an advance payment is received before the supply is performed, VAT arises at the end of the pre-registration period in which the payment was received (minimum cash-basis taxation under § 13 Abs. 1 Nr. 1 lit. a sentence 4 UStG).
Why must a prepaid expense (aktiver Rechnungsabgrenzungsposten) for VAT be recognised in the tax balance sheet?
Since the advance payment must be recognised as a liability at its full (gross) amount in the tax balance sheet, the VAT already to be remitted is initially recorded as an expense. To offset this, a prepaid expense (aktiver Rechnungsabgrenzungsposten) must be recognised as of the balance sheet date. It is released without affecting profit or loss once the underlying transaction is performed and the advance payment is offset against the receivable to be capitalised.
How does the treatment of advance payments received differ between the commercial and tax balance sheets?
In the tax balance sheet, the advance payment must be recognized as a liability on a gross basis, with the included VAT recorded as a prepaid expense (aktiver Rechnungsabgrenzungsposten). The commercial balance sheet does not require this approach: only the net amount is shown under 'advance payments received on orders', while the VAT is recorded under other liabilities until it is remitted to the tax office.
When may a received advance payment be derecognized through profit or loss?
The advance payment recognized as a liability may only be derecognized once the agreed service has been rendered and the receivable from the customer has therefore been realized. The advance payment is then offset against the receivable to be recognized, and the prepaid expense previously recognized for VAT is reversed without effect on profit or loss.