Microsoft Office Accounting Professional 2008

Receiving customer payments

The customer payment form allows you to record payments received from customers and settle them against invoices as well as recording VAT-inclusive prepayments, early payment discounts, write-off invoices fully or in part and settle credit notes against one or more invoices.

The 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, it changes status to Paid. If an invoice is only partially settled, its status is Partially paid.

You should note the following:

• The most common practice is to pay the oldest invoice first to avoid late payment charges for your customers, but Office Accounting allows you to allocate a payment to any invoice if you like.
• If the invoice has been 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 (e.g. 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 above, 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/year plus a number of days (e.g. if your invoices are due on the 15th of the following month).

Payment Term dialog

The early payment discount is set as part of the payment term, as the date where you will get an early payment discount of a specified percentage (typically 1-2%) for paying your invoice early. Giving 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 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 will post 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 account with the early payment discount amounts
• Debit the write off account with the write off amounts

Initially it may seem a bit odd that a customer payment of £490.00 can pay an invoice of £500.00 if 2% early payment discount is given, but that is the way early payment discounts works. You want to be able to compare the payment amount to what is deposited into the bank.

VAT-inclusive Prepayments

In a range of industries it is common to request full or partial payment up-front from customers before sending them a product or commencing work. According to HM Revenue and Customs regulations, output VAT must be paid upon receiving these prepayments, even when using the accrual accounting scheme. Office Accounting handles this by offering the ability to create a VAT-inclusive prepayment.

VAT-inclusive Prepayment

To create a VAT-inclusive prepayment, simply check the This is a VAT-inclusive prepayment checkbox and specify the VAT code. Office Accounting will then calculate the VAT fraction (in the example above £500*17.5/117.5 = £74.47) and the prepayment will then show up on the next VAT return. When the prepayment is settled with an invoice, the VAT return will reflect the actual VAT amount on the invoice.