Explore vendor payments and settlements

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To discuss vendor payments, let's first examine where they fit in with the business processes for Accounts payable.

Diagram that depicts business processes under accounts payable.

When paying for a product or service ordered from a vendor, you'll need to receive and enter invoices, generate and submit vendor payments, and manage vendor settlements.

There are multiple methods to enter a vendor payment, including using a payment proposal, manually entering a one-off payment, and prepayments. You will manage them from Accounts payable > Payments > Payment journal.

Create vendor payments by using a payment proposal

Payment proposals are often used to create vendor payments, because the query can be used to quickly select vendor invoices for payment based on criteria such as the due date and cash discount.

Organizations often use payment proposals to create vendor payments, because the payment proposal query can be used to quickly select vendor invoices for payment based on the due date, cash discount, and other criteria.

Let's review an example. Fabrikam works with vendors who have issued the invoices in the following table:

Vendor

Invoice

Invoice date

Invoice amount

Due date

Cash discount date

Cash discount amount

3050

1001

June 15

500.00

July 15

June 29

10.00

3050

1002

June 20

600.00

July 20

July 4

12.00

3075

1003

June 15

250.00

June 28

0.00

3100

1004

June 17

100.00

July 17

July 1

1.00

On July 1, April, who handles payments at Fabrikam, pays vendors. She uses a payment proposal to help her complete this task more efficiently.

Option 1: By cash discount

April selects Cash discount as the proposal type. She enters a date range of June 26 to July 10. The following invoices are included in the proposal:

  • 1002, because the discount date of July 4 is in the range of payment dates.

  • 1004, because the discount date of July 1 is in the range of payment dates.

The following invoices are not included in the proposal:

  • 1001, because the discount date of June 29 has already expired, so this invoice is no longer eligible for the cash discount.

  • 1003, because this invoice doesn't have a discount date.

Option 2: By due date

April selects Per due date as the proposal type. She enters a date range of June 26 to July 10. The following invoice is included in the proposal:

  • 1003, because the due date of June 29 is in the range of payment dates.

The following invoices aren't included in the proposal:

  • 1001, because the due date of July 15 is outside the range of payment dates.

  • 1002, because the due date of July 20 is outside the range of payment dates.

  • 1004, because the due date of July 17 is outside the range of payment dates.

Option 3: By due date and cash discount

April selects Due date and cash discount as the proposal type. She enters a date range of June 26 to July 10. The following invoices are included in the proposal:

  • 1003, because the due date of June 29 is in the range of payment dates.

  • 1002, because the discount date of July 4 is in the range of payment dates.

  • 1004, because the discount date of July 1 is in the range of payment dates.

The following invoice is not included in the proposal:

  • 1001, because the discount date of June 29 has already expired, so this invoice is no longer eligible for the cash discount, and the due date of July 15 is also outside the date range.

To learn more about creating vendor payments using a payment proposal, access the corresponding links in the Summary unit at the end of this module.

Prepayments

Organizations might issue prepayments (advance payments) to vendors for goods or services before those goods or services are fulfilled.

Two methods can be used to issue prepayments to vendors: prepayment invoicing and prepayment journal vouchers. To minimize risk, you can track prepayments by defining the prepayment on a purchase order. For this method, you must create a prepayment invoice that is associated with a purchase order. This method is referred to as prepayment invoicing. Organizations that don't want to track prepayments as closely or don't receive a prepayment invoice from their vendor can use prepayment journal vouchers instead of the prepayment invoicing method. You can create prepayment journal vouchers by creating journal entries and marking them as prepayment journal vouchers. For this method, you cannot track which prepayments to a vendor are made against which purchase orders. However, you can mark a posted prepayment for settlement against a purchase order.

To learn more about prepayments, access the corresponding link in the Summary unit at the end of the module.

Settlements

Settlement is the process of applying payment to an invoice.

Now let's examine an example of settlement.

Settle a partial vendor payment and the final payment in full before the discount date

In this scenario, partial payments are made for a vendor invoice, and a cash discount is taken.

Fabrikam buys goods from vendor 3064. The vendor gives Fabrikam a cash discount of 1 percent if the invoice is paid in 14 days. Invoices must be paid in 30 days. The vendor also lets Fabrikam take cash discounts on partial payments. The settlement parameters are located on the Accounts payable parameters page.

Vendor invoice on June 25

On June 25, April enters an invoice for 1,000.00 for vendor 3064. April can view this transaction on the Vendor transactions page.

From the Vendors page, April opens the Settle transactions page. She can use the Settle transactions page to view the dates and amounts of cash discounts. The due date is July 25, and a cash discount of -10.00 is available if the invoice is paid by July 9.

Partial payment on July 1 by using the Settle transactions page

April can create a payment journal for this payment by opening the Payment journal page in Accounts payable. She creates a new journal and enters a line for vendor 3064. She then opens the Settle transactions page, so she can mark the invoice for settlement. April marks the invoice and changes the value in the Amount to settle field to -500.00. She sees that the value in the Cash discount amount field is -10.00 for the full invoice and that the value in the Cash discount amount to take field is -5.05. Therefore, April is settling -505.05 of this invoice.

April wants to settle exactly half the invoice. Therefore, she changes the value in the Amount to settle field to -495.00. The total amount that is settled is now 500.00. This amount includes the -5.00 cash discount.

April closes the Settle transactions page. A payment line for 495.00 is created in the journal, and April then posts the journal. April can review the vendor transactions on the Vendor transactions page. She notices that the invoice has a balance of -500.00. She also notices a payment of 495.00 and a cash discount of 5.00.

Remaining amount paid on July 8

April pays the rest of the invoice for vendor 3064 on July 8, which is in the cash discount period. April creates the payment journal on July 8 and marks the transaction for settlement. She notices that the amount that must be settled is 495.00. The value in the Estimated cash discount field is -5.00, because the 5.00 discount was previously taken.

April posts the payment journal and reviews the vendor transactions on the Vendor transactions page. The balance for the invoice is now 0.00.