Credits, refunds, discounts, late fees and collections
You'll handle overpayments, credit memos, refunds, early-payment discounts and finance charges, send statements, and work the AR aging to collect.
- Principles:
- Revenue recognition
- Conservatism
When the customer pays the wrong amount
A partial payment lowers the balance and leaves the rest open. An overpayment leaves the customer with a credit: money you're holding for them. It's a liability until you apply it to another invoice or refund it.
| Account | Debit (Dr) | Credit (Cr) |
|---|---|---|
| Business Checking | $1,650.00 | |
| Accounts Receivable | $1,450.00 | |
| Customer Credits | $200.00 | |
| Total Balanced | $1,650.00 | $1,650.00 |
Are you Increasing or Decreasing?
| Debit | Credit |
|---|---|
| Liability | Asset |
| Equity | Draw |
| Revenue | Expense |
− To decrease an account, put it on the opposite side.
Accounts Receivable goes down: press − and find Asset on the credit side.
Credit memos
A credit memo lowers what a customer owes: for a canceled visit, a return, an overcharge or a goodwill credit. It takes the amount back out of income, the opposite of an invoice. Apply it to an open invoice, or refund it.
| Account | Debit (Dr) | Credit (Cr) |
|---|---|---|
| Sales | $180.00 | |
| Accounts Receivable | $180.00 | |
| Total Balanced | $180.00 | $180.00 |
Are you Increasing or Decreasing?
| Debit | Credit |
|---|---|
| Liability | Asset |
| Equity | Draw |
| Revenue | Expense |
− To decrease an account, put it on the opposite side.
Sales goes down: press − and find Revenue on the debit side.
(opens the full-size screenshot)Refunds
A refund gives money back: a customer's unused credit, a deposit for a canceled job, or a payment made twice. The refund lowers cash and clears the credit. Refunding a payment on an invoice puts that amount back on the invoice, so void or credit the invoice too if they no longer owe it.
| Account | Debit (Dr) | Credit (Cr) |
|---|---|---|
| Customer Credits | $200.00 | |
| Business Checking | $200.00 | |
| Total Balanced | $200.00 | $200.00 |
Are you Increasing or Decreasing?
| Debit | Credit |
|---|---|
| Liability | Asset |
| Equity | Draw |
| Revenue | Expense |
− To decrease an account, put it on the opposite side.
Customer Credits goes down: press − and find Liability on the debit side.
Early-payment discounts
Terms like 2/10 net 30 reward paying early: 2% off if paid within 10 days. The discount goes to a contra-revenue account, Sales Discounts, so you can still see full sales and the discounts given.
| Account | Debit (Dr) | Credit (Cr) |
|---|---|---|
| Business Checking | $980.00 | |
| Sales Discounts | $20.00 | |
| Accounts Receivable | $1,000.00 | |
| Total Balanced | $1,000.00 | $1,000.00 |
Are you Increasing or Decreasing?
| Debit | Credit |
|---|---|
| Liability | Asset |
| Equity | Draw |
| Revenue | Expense |
− To decrease an account, put it on the opposite side.
Accounts Receivable goes down: press − and find Asset on the credit side.
Late fees and finance charges
A finance charge is interest on an overdue balance. It's new income, usually booked to an other-income account, billed on its own invoice. State law limits rates and requires notice, so print your late-fee terms on every invoice and check your state's rules.
| Account | Debit (Dr) | Credit (Cr) |
|---|---|---|
| Accounts Receivable | $25.00 | |
| Other Income | $25.00 | |
| Total Balanced | $25.00 | $25.00 |
Are you Increasing or Decreasing?
| Debit | Credit |
|---|---|
| Asset | Liability |
| Draw | Equity |
| Expense | Revenue |
+ To increase an account, put it on its normal side.
Accounts Receivable goes up: press + and find Asset on the debit side.
Statements, aging and collections
A customer statement lists a customer's invoices, payments and balance on one page. Send them monthly to anyone with a balance.
The AR aging sorts what's owed by how late it is: current, 1 to 30, 31 to 60, 61 to 90 and over 90 days. Work it every week: a friendly reminder at 1 to 30 days, a call at 31 to 60, a firm letter and a pause on new work after that. The older a balance gets, the less likely it is to be paid, which is where write-offs come in (Lesson 3.5).
(opens the full-size screenshot)Try it in Leah Books
- Go to Customers > Credits and refunds and look at the Customers, Credit memos and Deposits tabs.
- Click New credit memo, pick a customer, add a $180 line for a canceled visit, save it and apply it to one of their open invoices.
- On the Settings tab, look at Early-payment discounts and Finance charges.
- Go to Customers > Customer statements and open a statement for a customer with a balance.
- Open Reports > AR aging summary and pick the customer you'd call first.
Key terms
- Overpayment
- A payment larger than the invoice. The extra becomes the customer's credit.
- Customer credit
- Money held for a customer: a liability until it's applied or refunded.
- Credit memo
- A document that lowers what a customer owes and reduces income.
- Refund
- Money paid back to a customer.
- Sales discounts
- A contra-revenue account for early-payment discounts.
- Finance charge
- Interest charged on an overdue balance, billed as other income.
Check what you learned
Pick an answer to see if it's right and why. Nothing is saved or sent.