How can I clear overpayments?

Georgie_8281276

We have an ex customer who is recorded in our system as overpaying 3 invoices from 2013 and 2014. Our ex bookkeeper ran a fairly loose ship so this was probably a data input problem, rather than actual overpayments. In any case, I have no way of contacting the customer to return the funds if I chose to do so. So I have this very annoying negative figure in my accounts receivable report. How can I remove it without destroying the audit trail?

DebonAir

You can do a journal or an invoice to sales and add the money to your sales. Then go to the custome payments and take the credit up against the invoice/journal.
It is actually income if you have kept the money and cannot refund it.

Georgie_8281276

That tidies things up on my accounts receivable, but then my P&L shows I've made that income this year, when actually the overpayments were many years ago. But it's not a good idea to create invoices for past periods, is it?

DebonAir

If you put the invoice back into the year the money was taken then you will mess up your books and then your BAS and your Financial Year income will not be correct.
Best to just leave it in this financial year as income and report it correctly.
It really should have been done years back you cannot go back and fix that now, too late.
It is good practice to check on these kinds of issues at the end of each financial year and make decisions annually. Hopefully you can do that from now on.

John Graetz

Hi Georgie.  As a first step I would be very much inclined to have a look at these supposed payments and see what actually happened to the money that was supposedly received.  Were they deposited to Undeposited Funds and then "banked", or were they direct deposits?  The eventual destination of these "deposits" might actually lead you to a compensating error somewhere.  I would be wanting to make sure that the money was actually received and ended up in your bank account before you look at doing anything else, otherwise you could end up reporting income which has never been received.  John L G

Georgie_8281276

Hi John,

Thanks for your advice.

I have checked the bank statement and they were directly deposited. Unfortunately my predecessor put everything into undeposited funds and then used "Record deposits" so that is a bit meaningless here! She was also very fond of the auto apply button, so there are a lot of incorrectly allocated payments in our system, and a lot of partial payments (with a note - overpayment or underpayment, but did she ever try to clarify with the customer?) which I am slowly trying to tidy up.

We are only talking about $300 here, so it's not a big deal, however I'd like it cleared up.

And yes DebonAir, I'm trying to run a very tidy ship these days, but unfortunately these old errors hang around messing things up.

Where to from here?

Georgie

DebonAir

I reconcile my bank daily. It takes 5 mins to do and you are right on top of any problems and deal with them quickly. Reconciling monthly can be a bit of a nightmare backtracking anything during the month. Now that I do this daily I never have any ongoing problems that I cannot deal with and end of month work is much easier to do.

Another benefit is that when customers call and say "oh no, I paid that a few days ago" I can confidently let them know that I have not received the payment instead of me being fobbed off for another few days or end of month.

Good luck with it all.

John Graetz

Georgie.  In my opinion, the fact that you are only dealing with $300 makes the solution quite simple.  Process a General Journal along the following lines:
1.  Debit Accounts Receivables (or whatever account you use) for the gross amount involved.  When you get to the ?Name column, key in the ?Customer? name.  You can only use one customer account per journal,  but in this case you seem to be only talking about one customer.
2.  Credit Sundry Income or something like that.
My personal opinion is that you do not need to use any GST codes.  I say this because the money received has not been for a supply.  Furthermore, I believe that if you write off a bad debt, you do not use a GST code, and in your case your are effectively writing off a "bad credit".  If you are concerned about using this approach, use GST as the code for the income account as it is only going to cost you around $27 in GST.
John L G

DebonAir

Well not strictly true John. If the business keeps the money, then this would mean that they did provide a service or a product (even if it is an overpayment, it is an overpayment on a product or supply) and should be using a tax code on the invoice/journal.

Bad debts also have tax codes on them in the business is registered for GST as this bad debt entry will be reversing the original invoice and so will also reduce the GST claimed/paid. This is more important if the business is calculating GST reporting in Accruals as the GST is paid on the invoice in the period the invoice was created.

John Graetz

DebonAir you are correct when it comes to Accrual Accounting and the ATO is quite clear on this.  Whilst it doesn't tend to refer to overpayments that are written off (one would have to suggest that this is a very rare event - unless you have a poor bookkeeper), I agree with you that the same principle would apply and that the GST code should be included on the journal entry.
John L G

Georgie_8281276

Fortunately for us we deal with a GST free product (fresh produce) so the tax code doesn't actually have a material impact in this case. 

So I will follow your advice and the annoying figure will disappear!

Thanks for the great discussion.