When a business firm gives any loan to its employees or to its sister concerns or to its directors then this loan is shown in asset side of the balance sheet because it is recoverable in future as per the terms of conditions of loans given. Normally, a company other than finance company should avoid of giving the loans. Of course, if the company has got surplus funds available with it, then the loan can be given. But the management must keeps in its mind that the income from giving the loans to outside is more than bank deposits. If possible, loans must be given against security. Some time loans are given to the employees of the company and the directors without any interest also. Interest free loans must be avoided as far as possible. Loans should be shown in assets side of balance sheet separately.
Advances are not loans. Advances are given for particular purposes against which either goods are to be received by company or services are to be received in near future. For example advance may be given to the supplier of goods or services. Normally, the advances are settled in very short period. Advance taxes are also shown as loans and advance (assets). Debit balance of VAT (Value Added Tax) and debit balance of excise duty is also shown treated as advances (assets).
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