We need to decide between implementing residual payment vs. partial payment. We will be implementing payment processing.
I would like to understand why one would choose one method over another?
What is the benefit of clearing original invoice and creating a new line item for the balance (as in case of residual payments)? There is a setting that allows user to capture the original invoice date at the time of payment processing while using residual payment, which I believe makes the residual payments same as partial payments, so again, why would one choose one method over another?
I would like to understand the benefits & limitations of each method.
How does the decision to implement a method get impacted if reason codes are to be implemented, which method would offer a better solution considering reason codes requirement?
Appreciate your inputs.
Residual Payment method reduces the open lines, but the disadvantage is that when you send the customer account statemet, customer might not be able to link the residual payment line with its original invoice and partial payment clearly.
Using Partial Payment method, customer can see clearly what all invocie has been issued to customer and what payments he has made. But it keeps the multiple open items, untill the invoice is fully paid/ cleared.
Do both the methods play well with utilizing reason codes to be used for deductions while processing incoming payments?
How does each method impact aging?
Edited by: SullivanUC2 on Jan 4, 2011 2:55 PM
Can you clarify how residual will result in fewer open items? The way I understand is, if a customer has two open items, one for $500 & one for $200 and makes payment of say $500 of which $400 goes to first item and $100 goes to second item, when residuals are created, you would 'still' have two open items (although amount would be less), same number as originally.
Edited by: SullivanUC2 on Jan 4, 2011 6:30 PM
Consider using residual items when the customer has apparently had the intention to pay the full amount of the invoice, but for whatever reason withheld an amount from the payment (e.g. cash discount after payment term, dispute about discounts). The residual item clearly identifies the payment deduction as a single line item. You can use the reason code to mark the item for furhter action, the dept dealing with disputes can easily identify the dispute. If you decide to write off the dispute, you always know you only need to clear this single item.
You will have fewer open items, because with a residual item, you clear the original invoice. As remarked in an earlier post, that also means that on the statement of account, you will only have that single item, not the original invoice amount and the payment amount. That may be a downside of using residual items, depending on your situation (although the residual items always has references to the original invoice, so it will be clear to the custome to which invoice the residual item refers to).
if the the customer clearly did not have the intention of paying the full amount, or clearly paid the wrong amount (I mean, a residual item of 60% of the invoice value does not make sense to me), then consider using the partial payment.
I am not aware of any differences with respect to overdue reporting, DSO etc.
In manual processing of incoming payments, it is of course the user who can make the decision to either make residual item, or a partial payment.
In automatic processing of incoming payments:
For electronic bank statements, payments that the system cannot match with open items will end up in post-processing; there the user can again choose either residual item or partial payment.
For electronic payment advices, I know that there is configuration to match customer information for payment deductions in the payment advice, with you own reason codes, and that based on the information the system can create the residual items automatically. Of course, this is only relevant if your customers actually send you electronic payment advices with such information included.
Regarding reason codes, you will always use reason codes with residual items; to indicate the reason for deduction for follow up in your A/R dept, and possibly to make use of the automatic write off (you can configure reason codes to automatically write off the payment deduction to some G/L account of your choosing; you would use that e.g. if the payment deduction is too small to bother).
For partial payment, you could use reason codes I guess, if you want to in that way mark the item for some reporting or follow up purpose.