Processing Prepayments, Overpayments and Debit Memos

The Cash Application program allows the operator to create Prepayment, Overpayment, and Debit Memo invoice records as required in order to track customer payments or deductions that can not be applied to specific invoices.   The Payment Entry program will not allow the operator to save a payment transaction until the To Apply amount in the program is equal to zero.  When a payment is being applied to a customer account in the Payment Entry program and the total amount of the payment has not been applied to specific invoices (or more than the payment amount has been applied to specific invoices) the To Apply amount displayed by the program will not be zero.  To deal with these situations, the system allows the operator to create invoice documents to track the unapplied or over applied payment amounts.  If the payment amount has not been completely applied (the To Apply amount is a positive number), the operator may create an overpayment (type OP) or prepayment (type PP) invoice to track the unapplied amount of the payment.  If the operator applies more than the amount of the payment to open invoices (the To Apply amount is less than zero), the operator may create a debit memo (type DM) invoice to record the over applied payment.  Multiple documents may be created for a single payment transaction so that you can handle multiple prepayments or unauthorized deductions on one check.  Comments can be added to each invoice document to explain why it was created and these comments will print for each invoice on the AR Aging.  The documents that are created are assigned a temporary invoice number during Cash Application and are converted to a permanent invoice number when the transaction is saved.

The Debit memo feature is especially useful for situations in which a customer deducts an amount from a payment due to a document they have generated.  In this case a deduction is being made based on a document which is not shown on you books (a typical example might be a negative AP invoice entered into the customers system due to returned merchandise that is not reflected in your own accounts receivable).  By creating a debit memo invoice you can apply the payment as indicated on the remittance advice and use the debit memo invoice to track the unauthorized deduction.  Once the unauthorized deduction is sorted out you can either apply a payment to the debit memo or you can create the actual credit and then use it to close out the debit memo invoice.  To create a debit memo, prepayment, or overpayment, the following steps should be performed.

1.  Process the customer payment as described in the previous section.  Apply the check or other payment to the appropriate invoices as indicated on the remittance advice from the customer.

2.  Once you have applied the payment to the appropriate invoices, determine whether the amount remaining in the To Apply field of the program is positive or negative and identify the reason for the difference between the invoices being paid and the payment amount.   If the amount is positive ( the payment has not been completely applied), the customer may be prepaying one or more orders or the customer might be paying an invoice that has already been paid.  If the amount is negative, the customer is most likely taking an unauthorized deduction of some type (they are “short paying” an invoice due to freight or sales tax or taking a deduction that is not on your books yet).

3.  Create one or more documents to track the un-applied or over applied payment amount.  When you press the Create dm or pp Button, the system will activate the Create AR Doc panel and it will load the panel with the unapplied amount from the Cash Application program.  The document type in the panel will default to OP or DM based on whether the To Apply amount in the program is positive (OP) or negative (DM).  Once the panel is displayed, you should

•    accept or edit the invoice type and amount for the invoice

•    Add an AR Comment to the invoice to explain why the document is being created.  This invoice comment is accessible from throughout the system and it is automatically printed for each invoice on the AR Aging report.

•    Enter any other required reference or PO information   The Prepayment panel also allows the operator to enter a reference number and purchase order number for each document.

4.  Verify that the To Apply amount shown in the Cash Application program is zero and save the transaction.

More:

Applying AR credit memos to open invoices