In the previous section we saw how sales, credit notes and customers receipts are posted to the Sales Ledger Control Account in the General Ledger, and to the customer accounts in the Sales Ledger.
When a business receives money from a credit customer it is important to identify which specific invoices are being paid. This needs to be done as it will enable the business to check that the customer is paying their debts on time and is paying the oldest debts first.
If the customer pays an unexpected amount this can indicate that the records of either the customer or the business might contain errors. Alternatively, it might mean that that the customer has financial difficulties or that there is a disagreement over a particular debt. Whatever the reason, it is important to resolve it as soon as possible.
Identifying the specific debts paid
In the majority of cases, it is straightforward to identify what a payment from a customer is for. Most credit customers send remittance advice slips with their payments and these will provide details of the amounts paid broken down between invoices and credit notes. Where a remittance advice slip is not used, many customers will simply pay the balance outstanding at the end of the previous month. In any event, the business can usually contact the customer and simply ask them for a breakdown of a payment.
But what do we do if it isn’t clear which debts have been cleared by the payment and we have been unable to contact the customer?
We will try and identify the combination of invoices and credit notes that comprise the amount paid. In doing so, it is worth remembering the following:
- Customers normally pay the oldest debts first
- Customers normally deduct the value of a credit note from the value of the invoice to which it relates
- The payment might be affected by any prompt payment discounts offered to customers
- Customers often withhold payment of disputed invoices (so it is worth checking to see whether there is any record of a dispute)
- Customers who are experiencing financial difficulties will sometimes:
- Make a payment on account (this is typically a round sum amount that clears some of the outstanding amount)
- Pay some of the invoices but omit one or two of the larger invoices
On 28th May a business received £2,930 from Stylo Ltd, one of its credit customers. Stylo Ltd’s customer account in the business’ Sales Ledger before this receipt is recorded is shown below.
It is clear that the bank receipt of £1,920 received on 10th May was to pay the balance at the start of the month. The receipt of £2,930 on 28th May must therefore be in respect of some or all of the invoices and credit note issued to Stylo Ltd during May.
The receipt of £2,930 matches the total of invoices 485 and 500 less credit note 83
i.e. £1,180 + £2,050 – £300
After this payment was received the customer’s remaining debt was £760 in respect of invoice 533.
On 14th October a business received £11,868 from its credit customer Gumm Ltd. The business offers a prompt payment discount of 2% for payment within 5 days. The business’ customer account for Gumm Ltd before this receipt is recorded is shown below.
The balance brought forward on 1st October does not qualify for a prompt payment discount (as it was more than 5 days old when the payment was received). Both invoices 689 and 711 would however, qualify for prompt payment discounts.
The payment on 14th October will clear the opening balance and invoice 689 once the prompt payment discount is taken into account.
i.e. £5,400 + £6,600 – 2% x £6,000 = £11,868
The outstanding debt following the receipt on 14th October is £5,500 and is in respect of invoice 711
A business received £7,600 from Bid Ltd, one of its credit customers. Bid Ltd’s customer account in the business’ sales ledger before this receipt is recorded is shown below
The amount received will clear the following; the balance brought forward of £7,156 plus invoice 6158 for £944 less credit note 499 for £500.
As customers normally pay the older debts first it is odd that Bid Ltd omitted invoice 6001 in its payment. The business’ accountant/bookkeeper should contact Bid Ltd to check if this was a simple oversight on their part or if there is an issue with invoice 6001 that needs to be discussed and then resolved.
On 29th December a business received £2,000 from Coll Ltd, a credit customer. Coll Ltd’s customer account in the business’ Sales Ledger before this receipt is recorded is shown below:
The payment clearly does not match with any individual or combination of invoices and credit note. The receipt is a payment on account and the business’ bookkeeper or accountant should contact the customer and check which invoice it should be set against.