Handling Customer Payment Deductions

This article deals with handling customer payments that do not fully pay off the open invoice.

Especially in the inventory-related industries, a lot of times customers will send check payments to apply to a specific invoice(s), however the amount of the check payment is short of what is completely due in the open invoice(s).

To account for this in your bookkeeping system, you should be posting the amount of the deduction, in addition to the check payment amount, in order to completely pay off the open invoice(s).

Some of the more common reasons why customers short pay on an open invoice are:

• Shipping fee deduction
• Spoilage allowance
• Damaged product (or even shorted product)
• Advertising
• Terms
• Other Fees

Typically, the type of account to post these short pays (difference between payment and invoice) will be either Income or Cost of Goods Sold type of accounts.

For example, Shipping Fee deductions probably will get posted in the same Cost of Goods Sold account as the other shipping/logistics COGS accounts. However, Terms deductions are typically posted to Income type of sub-accounts, that way these separate accounts show up as negative income balances, so the reader of the Income Statement can quickly see no service or penalty is accountable here, just a perk that the customer is taking advantage of.

Your bookkeeping software, however, may or may not allow you to conveniently post these ad hoc deductions at the time the customer payment is being posted. Ideally, you want to be able to account for these deductions DURING the customer payment function (customer payment screen) in your bookkeeping software. However, this is not always the case and thus you may have to resort to accountings for these deductions in other ways such as:

• Deposit posting screen (Undeposited Funds Screen)
• Altering the actual original invoice itself
• Customer credit memo

Overall, just come up with a consistent plan here (including creating the correct income and/or COGS accounts ahead of time) and always use this system for these ad hoc deductions.

Note: AccuraBooks is a bookkeeping firm only, so please consult with your C.P.A. for verification and clarification about the contents of this article.