Explain an overpayment from a customer

This article describes how to explain an invoice payment that has been paid into your bank account by a customer if the amount was larger than you were due to receive. It also explains the different options you have for processing the invoice overpayment.

Once the bank transaction relating to the overpayment has been imported into your FreeAgent account via a bank feed or uploaded from a bank statement, you will need to split the transaction and explain each part using the appropriate ‘Type’ and ‘Category’ as detailed below.

Please note that you will need to have level 6 access or above to your FreeAgent account to explain bank transactions.

Explaining the invoice payment

1. Navigate to the relevant bank transaction

Navigate to the 'Banking' tab at the top of the screen and select 'Bank Accounts' from the drop-down menu.

Choose the relevant bank account from the list.

Select the transaction that relates to the invoice overpayment.

2. Split the bank transaction

Next, you will need to split the bank transaction into the correct invoice payment amount and the remaining amount, which is the overpayment.

To do this, select ‘Invoice Receipt’ from the 'Type' drop-down menu.

Select the relevant invoice to allocate the payment to from the 'Invoice' drop-down menu.

Select 'Explain Transaction' to complete the process.

Explaining the invoice overpayment

When you split the bank transaction, FreeAgent will create a new transaction for the remaining balance, which you will also need to categorise depending on how you have agreed to process the overpayment with your customer.

You can either refund the overpayment to the customer, allocate it against an outstanding invoice or allocate it against a future invoice.

How to refund the overpayment

1. Explain the overpayment from the customer

Select the new transaction and then choose ‘Other Money In’ from the ‘Type’ drop-down menu.

Select ‘Receipt into Contra Account’ from the ‘Category’ drop-down menu.

You can use the ‘Description’ field to enter which customer the overpayment is related to and select ‘Explain Transaction’ to complete the process.

2. Explain the money as paid back to the customer

When you refund the overpayment to the customer, explain the ‘Money Out’ transaction when it is imported via your bank feed or uploaded from a bank statement as follows.

Select the relevant transaction and select ‘Other Money Out’ from the ‘Type’ drop-down menu.

Select ‘Payment from Contra Account’ from the ‘Category’ drop-down menu.

You can use the ‘Description’ field to enter which customer the refund is related to and select ‘Explain Transaction’ to complete the process.

How to allocate the overpayment against an outstanding invoice

If you have agreed with your customer that the overpayment will pay off or reduce an amount that they owe on an outstanding invoice, select the new transaction (that was created when you split the original transaction) and then select ‘Invoice Receipt’ from the ‘Type’ drop-down menu.

Next, select an outstanding invoice for this customer from the ‘Invoice’ drop-down menu.

Select ‘Explain Transaction’ to complete the process. Depending on the value of the overpayment and the outstanding invoice balance, this will either fully pay off the invoice or reduce the amount that the customer owes you.

How to allocate the overpayment against a future invoice

1. Explain the overpayment from the customer

If you have agreed with your customer that the overpayment will pay off or reduce an amount that they owe on a future invoice, select the new transaction (that was created when you split the original transaction) and then select ‘Other Money In’ from the ‘Type’ drop-down menu.

Select ‘Receipt into Contra Account’ from the ‘Category’ drop-down menu.

You can use the ‘Description’ field to enter which customer the overpayment is related to and select ‘Explain Transaction’ to complete the process.

2. Edit the explanation

When you create another invoice for your customer, you will need to edit the explanation for the overpayment.

To do this, select the transaction that relates to the overpayment.

Change the transaction ‘Type’ to ‘Invoice Receipt’ using the drop-down menu.

Select the newly created invoice from the ‘Invoice’ drop-down menu.

Select ‘Save Changes’ to complete the process. Depending on the value of the overpayment and the outstanding invoice balance, this will either fully pay off the invoice or reduce the amount that the customer owes you.

Alternatively, if you want to view the customer's credit before their next invoice has been created, you can create an invoice for the amount of the overpayment and then a credit note.

To do this, begin by creating an invoice for the amount of the overpayment.

Next, select the transaction which relates to the overpayment and select ‘Invoice Receipt’ from the drop-down menu.

Select the newly created invoice from the ‘Invoice’ drop-down menu.

Select, ‘Explain Transaction’ to complete the process.

Next, create a credit note from the invoice for the amount of the overpayment.

When you create the customer’s next invoice, you can match the credit note to the invoice to reduce the amount that the customer owes you for the invoice by the credit note amount.