Payment on account definition
/What is Payment on Account?
A payment on account occurs when a payment is received from a customer, and there is no notation with the payment regarding which invoice is being paid. A payment on account can also refer to an advance payment, which the recipient then applies to subsequent invoices as they are generated.
Example of a Payment on Account
Trinity Supplies, a company that sells office equipment, has a regular customer, Xavier Corp., which frequently makes purchases on credit. Over the past month, Xavier has received multiple invoices from Trinity totaling $5,000. Instead of specifying which invoices they are paying, Xavier sends a payment of $2,000 without any reference to specific invoice numbers.
In this case, the $2,000 received is considered a payment on account because it reduces the overall outstanding balance but does not settle any specific invoice. Trinity will update Xavier’s account balance to reflect the payment and may follow up to clarify which invoices should be applied if needed.
Accounting for a Payment on Account
When a payment on account transaction occurs, the seller records the payment in a pending account, while depositing the check and maintaining all information received about the payment in a file. The contents of the pending account are later investigated and cleared as more information is obtained from customers.
Payment on Account Best Practices
There are several best practices associated with payment on account situations, which are as follows:
Frequent investigations. The accounting department of the recipient needs to investigate these payments on a regular basis, or else the status of its detailed invoice records will become increasingly inaccurate over time. Ideally, these payments should be investigated every day, except during peak periods of department activity (such as closing the books).
Contact the payer. If a payer does not document a payment, then it will probably continue to do so. Consequently, if you spot an incoming payment with no supporting detail, contact the paying party as soon as possible to discuss the matter. Hopefully, this will result in the payer providing detailed supporting information in the future, when it sends in other payments.