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Best Practice on applying a partial payment with interest on older invoices?

Forum|Forum|2 years ago
January 7, 2024
2 replies
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We have a client who has made a partial payment via wire (about 50% owed) against 7 invoices. They wired direct to the bank, so this is a manual entry I'm trying to sort out.

Each invoice incurred 0.5% monthly, non-compounding. In receiving that, do we start with the oldest and apply against principal only or do we cover principal and interest on the oldest, then the next oldest, etc.?

What's the best practice expectation here?

QuickBooks Online

Best answer by Rainflurry

@meticulous-llc

Your post is a bit confusing. You mentioned your client made a payment but then also stated "In receiving that," which implies your client received the payment. I'm going to assume that your client made a payment on 7 bills they owe.

Payments on overdue bills are usually allocated based on the terms and conditions of the vendor agreement. The vendor agreement (if there is one) will spell that out and those terms are sometimes listed on the vendor bills. In my experience, the most common practice is to apply the payment to the finance charges first then the principal, by invoice. So, if you have two invoices, the first for $100 with $10 in finance charges and a second invoice for $200 with $20 in finance charges, the payment is applied, in order to:

1) $10 finance charge

2) $100 invoice balance

3) $20 finance charge

4) $200 invoice balance

But, the vendor may have different terms so this is not universal.

D

DebSheenD

Hello there, @meticulous-llc.

I'll provide information about applying for partial payment with interest to old invoices in QuickBooks Online (QBO).

You'll have to manually add the interest on overdue invoices. You can create or set up the interest as a service item in QBO.

Go to the Gear icon and choose Products and Services.
Click on New and select Service.
Enter the name of the item and choose an income account.
You can also enter the rate of the item.
Click on Save and close once you're done.

When doing this process, I recommend seeking guidance from a professional accountant. They possess the expertise to provide accurate instructions and strategies for properly handling the movement of funds. Since you'll add the principal and interest service item to the invoice.

To find an accountant, let's follow these steps:

Go to the Find-a-ProAdvisor website.
Enter the specific location, service, and product.

You can also browse this article as your guide in keeping track of your customer payments: Record invoice payments in QuickBooks Online.

Fill me in if you have concerns about recording transactions. I'm here to help you out, @meticulous-llc. Have a good one!

RainflurryAnswer

@meticulous-llc

Your post is a bit confusing. You mentioned your client made a payment but then also stated "In receiving that," which implies your client received the payment. I'm going to assume that your client made a payment on 7 bills they owe.

Payments on overdue bills are usually allocated based on the terms and conditions of the vendor agreement. The vendor agreement (if there is one) will spell that out and those terms are sometimes listed on the vendor bills. In my experience, the most common practice is to apply the payment to the finance charges first then the principal, by invoice. So, if you have two invoices, the first for $100 with $10 in finance charges and a second invoice for $200 with $20 in finance charges, the payment is applied, in order to:

1) $10 finance charge

2) $100 invoice balance

3) $20 finance charge

4) $200 invoice balance

But, the vendor may have different terms so this is not universal.

meticulous-llcAuthor

Thanks! That answered my question. the vendor agreement doesn't specify this granularity on payment processing. I'll ping our accountant to verify.

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