Applying customer payments: unapplied cash, credit memos, overpayments, and returns

Cash application is the process of matching received payments to the invoices they pay. Do it within a day or two of receipt. Use the remittance advice, the amount, and the customer's reference. Payments that cannot be matched should not sit in revenue or in a miscellaneous account.

When money arrives and you cannot tell what it is for, record it in an unapplied cash account, which is a liability, and contact the customer. Review it weekly. A growing balance means customers look late on the aging report when they have in fact paid, and it usually points to a process problem, such as payments without invoice numbers.

A credit memo reduces what a customer owes without erasing the original sale. Use it for returns, pricing corrections, and agreed concessions. Link it to the invoice, record the reason, and apply it against an open balance or refund it. The original invoice and the credit memo should both remain in the record so the history is complete.

If a customer pays too much, the extra is not revenue. It is money you owe them. Record it as a customer credit or refund it. Decide on a policy, such as refunding anything above a small amount within a set number of days.

When a check bounces or an ACH debit is returned, the payment did not happen. Reverse the receipt and reopen the receivable, then record any bank fee, and contact the customer. Keep the original and the reversal visible so the trail is clear. If you charge a returned-payment fee, record it separately.

Sequential invoice numbers with no gaps make revenue easier to audit and missing invoices easy to spot. Do not reuse or delete numbers. If an invoice was wrong, void it or issue a credit memo and a new one.