Process Customer Overpayments

This procedure explains how to record the transactions required when a customer overpays you.

Note that if the payment is an overpayment of a single invoice and there are other outstanding invoices for the customer, then this would not be considered an overpayment in the example being covered here. You should assign the excess payment to one of the other invoices.

Let's assume you have only one invoice outstanding for £200 and your customer pays you £250.

1. Create a Customer Overpayments account in your Chart of Accounts

If it doesn't already exist, create an account in your Chart of Accounts called 'Customer Overpayments' (Account Group - Liabilities, Account type - Current Liabilities, Default VAT - Out of Scope).

2. Enter a payment against the customer invoice

Use the Receive Money option to enter £200 as a Customer Invoice Payment transaction to settle the outstanding invoice. If you are entering the payment from an imported bank statement, then you will need to change the Amount Received from £250 to £200. The reason for this is that you need to enter a separate Receive Money for the £50 overpayment (see the next step).

3. Enter a separate payment for the overpayment value

Use the Receive Money option to enter the £50 overpayment as a General Receipt. In the line item, select the 'Customer Overpayments' account and apply the 'Out of Scope' VAT Code (or 'No VAT' if not registered).

If you intend to refund the overpayment, continue with 4. If you intend to apply the overpayment against the next invoice you issue, then go to 5.(VAT registered on Accrual Basis or not registered) or 6.(VAT registered on Cash Basis).

4. Refund the overpayment

Enter a Sales Credit Note transaction for £50. In the line item, select the 'Customer Overpayments' account and apply the 'Out of Scope' VAT Code (or 'No VAT' if not registered). When you pay the customer, use the Spend Money option to enter a Customer Refund.

5. Offset overpayment against next invoice - you are VAT registered on Accrual Basis or not registered

Enter a Sales Credit Note transaction for £50. Allocate the Credit Note to the next available invoice.

6. Offset overpayment against next invoice - you are VAT registered on Cash Basis
In order for the VAT to be correctly calculated under the Cash Basis, the invoice needs to be 'paid' rather than have a Credit Note allocated against it. Remember that at this stage the full £250 has already been received into the bank account (steps 2 & 3). To simulate a payment type transaction and and apply the amount in the 'Customer Overpayment' account against the invoice in the customer account, carry out the following 2 transactions:

a. Spend Money - General Payment for £50
This moves the £50 overpayment out of the 'Customer Overpayments' account and into the bank account. In the line item, select the 'Customer Overpayments' account and apply the 'Out of Scope' VAT Code.

b. Receive Money - Customer Invoice Payment for £50
Ensure that you enter the same Bank Account as a. above. Select the appropriate invoice to allocate the payment against it.

Note that the net impact of the above two transactions on the bank account is zero.