Posting Payments Properly...:)

Photo from Microsoft Office Clip Art

 



I am going to begin this entry with a hypothetical question...

Now, suppose your business received an invoice from a vendor for either services or goods rendered, and you remit payment to the vendor. You would expect to have the payment applied to the invoice then, correct?

Unfortunately, that is not always the case. I was shocked and dismayed when I learned earlier this week that a law firm my business uses for legal matters does not apply payments to the invoices, but rather, towards the past due balance if necessary. That sends out the wrong message entirely.

In my years of working in the accounting field (especially accounts receivable), the best way (and I should mention the ONLY WAY) to apply payments received is to apply them TOWARDS THE INVOICE referenced on the remittance information provided on the check (or online payment, since of course there's always more than one way of remitting payments). It's an apples-to-apples equation and definitely not rocket science.

When handling payments, if the payment is only applied to the past due balance and not the invoice itself, that invites all sorts of issues galore--confusion, frustration, and perhaps distrust. The client on one end of the spectrum may insist that their records show the invoice as being paid in full, while on the other end the vendor may beg to differ, indicating that the information is irrelevant since their records would show the invoice as open due to how the payment was applied.

You see the confusion so far? It is frustrating, isn't it? In fact, you might take your business elsewhere if you feel that your payments are being mishandled, so to speak.

Now granted, I've never worked for the IRS or the local tax authority (in this case, the Arizona Department of Revenue), but I do wonder if any of the agents who have had to audit a business would roll their eyes in annoyance when they hear about how the business handles their accounts receivable by only applying the payment to the past due balance and not directly towards the invoice referenced. For all anyone knows, that could very well be the main reason why the business was being audited in the first place.

The research process would commence in a smooth, uninhibited manner if this business ethic was used. I speak from personal experience. For example, let's say I receive a statement from a vendor indicating that an invoice is unpaid. However, my records show the invoice as paid. I make a simple phone call to the vendor, provide them with the necessary information, and about a day later I receive a call from the vendor explaining that the payment was applied incorrectly and made the necessary correction. Issue resolved, and that is that.

But on the flipside, and this is a true example, let's say I did receive a statment from a vendor (the law firm) indicating that there is a past due balance. I do my research, notify the individual handling the accounting for the firm, and explain the situation. Then the bombshell is dropped: "We only apply payments towards balances, not individual invoices." You may want to let out a little sigh of exasperation (it's best and professional to wait until after the conversation is finished), but you will have no choice but to present the vendor with the information you have, explain how checks are issued, and give them adequate time to do the necessary research on their end. We can all hope that they may consider changing their accounting policies.

We may be familiar with the term "checks and balances" (no pun intended), which according to the Merriam-Webster Dictionary is defined as "a system that allows each branch of a government to amend or veto acts of another branch so as to prevent any one branch from exerting too much power." Of course, it's impossible for a client to dictate to their vendor how they should be handling any payments received, but from an accounting perspective, the term "checks and balances" seems to make fairly good sense. If all businesses were able to apply payments received directly to the corresponding invoices and not just the past due balance, would that, perchance, improve the economy? Would that help businesses to become favorable towards prospective clients, avoid costly and nerve-wracking audits and lawsuits, and be more profitable?

It may be an accounting utopia, but we can all dream. WLB :)