Describe vendor payments and settlements
When paying for a product or service ordered from a vendor, you 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 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. 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.
The following table provides an example in which vendors issued the invoices.
| 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, the accountant who handles payments, pays vendors. The accountant uses a payment proposal to help complete this task more efficiently.
Option 1: By cash discount
The accountant selects Cash discount as the proposal type. They enter a date range of June 26 to July 10. Given that, 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 aren't included in the proposal:
1001, because the discount date of June 29 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
The accountant selects Per due date as the proposal type. They enter a date range of June 26 to July 10. Given that, 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
The accountant selects Due date and cash discount as the proposal type. They enter a date range of June 26 to July 10. Given that, 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 isn't included in the proposal:
- 1001, because the discount date of June 29 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.
You can choose from two methods 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 can't 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.
Your company buys raw materials from a vendor, who gives a cash discount of 1 percent if the invoice is paid in 14 days. Invoices must be paid in 30 days. The vendor also gives cash discounts on partial payments. The settlement parameters are located on the Accounts payable parameters page.
Vendor invoice on June 25
On June 25, the accountant of your company enters an invoice for $1,000.00 for the vendor. The accountant can view this transaction on the Vendor transactions page.
From the Vendors page, your accountant opens the Settle transactions page. The accountant 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
The accountant of your company can create a payment journal for this payment by opening the Payment journal page in Accounts payable. The accountant creates a new journal and enters a line for vendor. The accountant then opens the Settle transactions page to mark the invoice for settlement. Then, the accountant marks the invoice and changes the value in the Amount to settle field to -500.00. They notice 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, the accountant is settling -505.05 of this invoice.
The accountant wants to settle exactly half the invoice. Therefore, they change the value in the Amount to settle field to -495.00. The total settled amount is now 500.00. This amount includes the -5.00 cash discount.
After your accountant closes the Settle transactions page, a payment line for 495.00 appears in the journal, and the accountant then posts the journal. They can review the vendor transactions on the Vendor transactions page. The accountant notices that the invoice has a balance of -500.00, and also notices a payment of 495.00 and a cash discount of 5.00.
Remaining amount paid on July 8
The accountant pays the rest of the invoice for vendor 3064 on July 8, which is in the cash discount period. The accountant creates the payment journal on July 8 and marks the transaction for settlement. The accountant 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.
The accountant posts the payment journal and reviews the vendor transactions on the Vendor transactions page. The balance for the invoice is now 0.00.
The following video explains the vendor payment methods.
Depending on the business requirements, different processes can be used for the vendor payment.