It is also called an unapplied payment or unapplied receipt. The amount usually sits as a credit on the customer's account, or in an unapplied cash account in the general ledger, until someone works out which invoices it covers. Matching payments to invoices and recording the result is called cash application.
Unapplied cash vs unidentified cash and on-account payments
- Unapplied cash. You know who paid but not yet which invoices the payment covers.
- Unidentified cash. You cannot tell who paid, so the money is held in a suspense account until you find out.
- On-account payment. The customer pays toward its balance without naming invoices, or pays a deposit before any invoice exists. It stays as a credit until there is an invoice to apply it to.
- Overpayment. The customer paid more than it owed or paid the same invoice twice. You apply the extra to later invoices or refund it.
Why payments end up unapplied
- The payment arrives without a remittance advice, and the bank reference is too short to name the invoices.
- One payment covers many invoices, sometimes minus credit notes.
- The customer pays short, for example after taking an early payment discount or holding back a disputed amount.
- A parent company pays for several subsidiaries that you hold as separate customer accounts.
- Bank charges or exchange rate differences leave the amount slightly off.
- The customer quotes the wrong invoice or purchase order number.
The cash application process
- Collect the payment details. Take each receipt from your bank account records, card processor or lockbox file, together with any remittance advice.
- Identify the customer. Use the payer name, your customer number or the payment reference.
- Match to open invoices. Look for an exact amount and reference first, then for combinations of invoices and credit notes.
- Apply what you can. Close the invoices the payment clearly covers and record any difference as a short payment or deduction to investigate, rather than leaving the whole payment unapplied.
- Post it in your ERP or accounting system. Paid invoices close and the customer's balance is right.
- Clear the rest. Ask the customer about anything you cannot match, and review the unapplied balance every week and at month end.
Example. Northgate Tools has three open invoices with you, for $4,250 due September 10, $6,800 due September 24 and $3,950 due October 8, a total of $15,000. On October 2 it sends $11,050 with the reference September invoices and no remittance advice. No single invoice matches, but $4,250 + $6,800 = $11,050, so the payment covers the two September invoices exactly.
Once the payment is applied, the customer owes $15,000 minus $11,050 = $3,950, for an invoice that is not yet due. Had Northgate paid $10,850, you would close the $4,250 invoice, apply the remaining $6,600 to the $6,800 invoice and ask about the $200 short payment. The figures are illustrative.
How unapplied cash distorts receivables reports
Left unapplied, the two September invoices in the example would show $11,050 overdue on the October aging report, with an $11,050 credit sitting separately on the account. Reminders would go out for invoices that are paid, and the account could even be put on hold.
If the payment sits in a suspense account instead of on the customer's account, total accounts receivable is overstated as well, which pushes up days sales outstanding. Clear unapplied and unidentified cash before you run month-end reports, and refund old overpayments rather than letting credits pile up.
Sunbay matches incoming payments to invoices using data from your ERP or accounting system and stops reminders on invoices that are paid, so customers who have paid are not chased. When a customer replies that a payment covers several invoices or explains a deduction, the reply stays next to the invoices concerned, where whoever applies the cash can see it. Its view of every invoice and payment shows which balances are still open.
Frequently asked questions
Is unapplied cash an asset or a liability?
The cash itself is an asset in your bank account. The unapplied amount is a credit on the customer's account that reduces receivables until you apply it. If there is nothing left to apply it to, as with an overpayment or a deposit, it is money you owe the customer and is usually reported as a liability at the period end.
How do you record unapplied cash?
When the payment arrives, debit cash and credit the customer's account, or an unapplied cash account, without selecting invoices. Once you know which invoices it pays, apply the credit to them, which closes those invoices and leaves the customer's total balance unchanged.
How often should you clear unapplied cash?
Daily or every few days in the collections team, so reminders and credit holds use the right balances, and fully at each month end. Credits that stay unapplied for months usually mean a refund is due or a dispute is open.
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