Loan refers to money lent to a borrower for Short-Term,
Long-Term or for unspecified period (Working Capital
facility which is renewed every year). Loan carries a
specific rate of interest as agreed between the lender & the
borrower and the terms of the agreement. A loan may be for
general purpose (Say working capital) or specific purpose
(Equipment loan, Export Packing Credit, etc.)
On the other hand Advance refers to money paid in advance to
any one to meet a specific future expense, liability or to
tide over some specific requirements. Advances paid by an
employer to employee may be to meet certain expenses like
official travel, or to meed some personal needs in the form
of salary advance. Advance paid to meet official expenses
will be settled once it's expended for the said purpose,
salary advance may be recovered by deduction form monthly
salary as per the policy of the company.
Again advance may be paid to discharge a future liability.
For example :Income Tax paid in Advance. Again advance may
carry interest - The company may charge nominal interest on
the advance paid to it's employees. In case of Income Tax
advances, the Government will written the advance in excess
of actual tax liability with interest to the asessee who has
paid advance tax.
Again there may be payment of money in advance by a buyer to
a supplier of goods & there may be a clause in the purchase
order that, the supplier will be liable to pay interest at a
specified rate in the event of delay in supply as per the
terms of Purchase Order accepted by them.
One major difference between the two is :Loan is always
under a contractual arrangement between the lender and the
borrower & it carries interest, but generally advance is
made with out agreement and may not carry interest in all cases.
loan is against a security but advance is not against any security, for example vehicle loan given to employees is against the security of the vehicle and if advance is given for travel then it is not against any security
A security is created in the case of a loan whereas in the case of an advanced, security is already there. A moving asset (i.e. Car) is created in the case of a Car Loan. The best example of an advance is Cash Credit secured by hypothecation of stocks. An advance is granted for a short period, say for a period of 12 months, renewed annually.
LOAN OR ADVANCE- BOTH ARE TREATED AS A CREDIT FACILITY. BUT IF THE CREDIT FACILITY IS REPAYABLE IN A SHORT PERIOD SAY WITHIN ONE YEAR IT IS TREATED AS "ADVANCE" AND IF THE CREDIT FACILITY IS REPAYABLE MORE THAN A YEAR IT IS TERMED AS "LOAN"
1) XYZ Ltd bought goods for Rs.200000 from ABC Ltd. The co
gave 10% discount. give journal entries in the books of ABC
Ltd and XYZ Ltd.
2) Goods bought for Rs.400000. While transporting goods
destroyed. Insurance co agreed to pay 75%. post journal