It is also called payment application or cash posting, although cash posting sometimes means only recording the receipt in the bank account. A payment that has arrived but has not been matched yet is unapplied cash, and the aim of cash application is to keep that balance close to zero.
Why cash application matters
- Collections. Customers who have paid should not get reminders, and those who paid short should hear about the gap quickly.
- Credit decisions. Credit limits and account holds work from open balances, so an unmatched payment can put a good customer on stop.
- Reporting. Days sales outstanding and the aging report are only as accurate as the matching behind them.
- Month end. Unmatched receipts have to be explained before the books close.
In larger companies an accounts receivable or shared services team applies cash every day, separately from collections. In smaller ones the same person often applies cash and chases invoices, and when the matching falls behind, reminders go out for invoices that are already paid.
Where payment information comes from
- Bank statements and feeds. Amount, date, payer name and a short reference.
- Remittance advice. The customer's list of the invoices a payment covers and any deductions. See what a remittance advice contains.
- Lockbox files. In the US, a bank collects mailed checks for you and sends a file with the payment details.
- Card and payment processors. Settlement reports that show the fees deducted from each payout.
- Direct debits and virtual accounts. When each customer pays under a mandate or into its own account number, the payer is known from the start.
Common matching situations
| Payment received | How to apply it |
|---|---|
| One payment for one invoice, same amount | Apply it and close the invoice |
| One payment for several invoices | Find the invoices that add up to the amount, using the remittance advice if there is one |
| Payment net of a credit note or discount | Apply the payment and the credit note together, and check any discount against your terms |
| Short payment | Apply what you can and log the difference as a deduction to investigate |
| Overpayment or duplicate payment | Apply it to the invoice and hold the rest as a credit, or refund it |
| Payer unknown | Hold it in a suspense account and ask the bank or the likely customers |
Cash application example
Example. On October 6, Ridgeway Foods sends $18,660 with the reference RF remittance 1009. Its remittance advice lists invoice 5521 for $9,400 and invoice 5530 for $10,060, minus credit note CN-77 for $800 for returned stock. Applying the $18,660 together with CN-77 closes both invoices, because $9,400 + $10,060 minus $800 = $18,660. Without the remittance advice, the amount would match no single invoice, the payment would sit unapplied and both invoices would keep drawing reminders. All figures are illustrative.
Once a payment is applied, the entry debits cash and credits the customer's account in accounts receivable, and the invoices it pays are marked as closed.
How to automate cash application
Most automation starts with matching rules and sends the exceptions to a person. A common order is an exact amount with the invoice number in the reference, then the amount and the customer, then combinations of open invoices and credit notes, with a small tolerance for bank charges that are written off automatically.
Three numbers show how well the process works.
- Auto-match rate. Payments matched without manual work divided by all payments received, times 100.
- Unapplied cash ratio. Unapplied and unidentified receipts divided by total accounts receivable, times 100.
- Time to apply. Days from the money reaching your bank to the invoice closing in the ledger.
Example. A team receives 400 payments in a month and its rules match 312 of them, an auto-match rate of 312 ÷ 400 × 100 = 78%. The other 88 go to a person, and their most common causes, such as missing remittance advice or a parent company paying for its subsidiaries, show where to fix the process.
Sunbay matches incoming payments to invoices using data from your ERP or accounting system, so reminders stop on invoices that are paid. When a customer explains a deduction or says which invoices a payment covers, the reply stays next to those invoices, where whoever applies the cash can find it. See every invoice and payment in one place.
Frequently asked questions
What is cash application in accounts receivable?
It is the step that matches each customer payment to the invoices it pays and records the result, so paid invoices close and the customer's balance shows what is really still owed.
What is the difference between cash application and cash posting?
Cash posting usually means recording a receipt in the books, and cash application means allocating it to specific invoices. Many teams use the two terms for the same job.
How often should cash be applied?
Every business day, or as often as payments arrive. Collections, credit holds and reports all work from open balances, so a backlog of unapplied payments affects all three.
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