Applies to: Office Accounting Express, Office Accounting Professional
With the Customer Payment form, you can record payments received from customers and settle them against invoices. You can also record VAT-inclusive prepayments and early payment discounts, write off invoices fully or in part and settle credit notes against one or more invoices.
Sample Customer Payment form
It is important to settle the individual invoices with payments, so you know which invoices have been paid and when. When an invoice is fully settled with a payment, its status changes to Paid. If an invoice is only partially settled, its status is Partially paid.
Note the following about customer payments:
- The most common practice is to pay the oldest invoice first to avoid late payment charges for your customers. However, with Microsoft Office Accounting 2008, you can allocate a payment to any invoice if you like.
- If the invoice is set up with early payment discounts, and the invoice is paid in full (considering the discount) before the discount date, the early payment discount will appear. (The VAT on the invoice will always be discounted regardless of the actual payment date.) The amount and the account may be edited (by clicking the link in the Early Payment Discount column).
- If the customer sent a cheque for part of the amount (for example, pays £66.37 instead of £66.57), you can write off the remaining amount to fully settle the invoice (by clicking the link in the Write Off column).
- You can apply one or more credits (from customer credit notes, previous write offs or journal entries) by clicking the link in the Applied Credits column.
- If the customer payment isn't settled with any invoices, it remains unapplied. A customer payment can also be partially applied or applied.
Early payment discounts
As mentioned previously, you give early payment discounts by setting a payment term on the invoice that allows an early payment discount for early payment. Payment terms can be set up to be due after a certain number of days or at the end of the month, quarter, half year or year plus a number of days (for example, if your invoices are due on the 15th of the following month).
Payment Term dialog box
The early payment discount is set as part of the payment term, as the date when you get an early payment discount of a specified percentage (typically, 1 or 2 percent) for paying your invoice early. Giving an early payment discount reduces the risk of customers not paying or paying late, and it improves the cash flow of the business. However, it does come at a cost. The effective annual percentage rate (APR) of improving your cash flow this way could be quite high but it may be preferred over poor cash flow due to late customer payments.
The VAT amount on the invoice will be reduced accordingly, regardless of whether the invoice is paid before the early payment discount date.
Customer payment postings
The customer payment posts to the underlying nominal accounts. The customer payment will:
- Credit the customer on the sales ledger account with the payment amount, the early payment discounts and the write off amounts.
- Debit the deposit account with the paid amount.
- Debit the early payment discount given to the account with the early payment discount amounts.
- Debit the write off account with the write off amounts.
Initially, it may seem unusual that a customer payment of £490.00 can pay an invoice of £500.00 if a 2 percent early payment discount is given, but that is how early payment discounts work. You want to be able to compare the payment amount to what is deposited into the bank.
In a range of industries, it is common to request full or partial payment in advance from customers before sending them a product or commencing work. According to HM Revenue & Customs regulations, output VAT must be paid upon receiving these prepayments, even when using the accrual accounting scheme. In Office Accounting 2008, you can create a VAT-inclusive prepayment.
To create a VAT-inclusive prepayment, on the Customer Payment form, select the This is a VAT inclusive pre-payment check box and specify the VAT code. Accounting 2008 then calculates the VAT fraction (in the preceding example, £500*17.5/117.5 = £74.47). The prepayment appears on the next VAT return. When the prepayment is settled with an invoice, the VAT return reflects the actual VAT amount on the invoice.