Sometimes a payment is received from a customer that is for an amount that is not equal to the amount billed. The customer may have applied a discount incorrectly or the reason for the reduced amount is not identifiable at the time of payment processing. As a result, one or more invoices are short paid, which leaves the associated financial voucher open until the short payment can be researched and determined if the open amount is collectable. In addition, while the short payment is being reviewed the customer is viewed as having an aging issue, as the open portion of the invoice remains unpaid until the full invoice amount is closed and settled with a payment or other adjustment if deemed uncollectable. It is a common issue in certain industries and heavily depends on strictness of your AR policies and total number of invoices processed. For some of our customers, the deductions amount reaches millions of dollars annually.
The short payment causes several issues for Accounts Receivable (AR):
- When a collections agent, who is not the same employee posting the short payment, attempts to contact the customer to collect on the open amount, the portion of an unpaid invoice that remains open may be disputed. Therefore, often the customer’s system will reflect the invoice as paid. In most cases, neither your employee nor customer’s employee are aware of the reasons for the discrepancy and require further research by both teams, wasting both your AR employee’s time as well as customer’s time.
- When your organization has no means of tracking short payments and customer payments have been processed for some time you may have a significant amount of severely past due invoices for various customers which consist of very small amounts without significant details. The small amounts may be deemed uncollectable and need to be written off.
- Finally, without the ability to track and collect the small deduction amounts taken by your customers your organization may write off with little understanding or little visibility as to why the customer originally took the deduction from their payment. Over time the small amounts deemed uncollectable add up to a significant amount and your organization has no record and unable to analyze as to why your customer’s invoices are continuously short paid.
In Microsoft Dynamics AX 2012 R3, the Deductions Management feature allows accounting to record such deduction amounts at the time of posting customer payment journal and keep a track of such short pays. The process can include deduction reason codes. By entry of reason codes, impact can be analyzed and managed long-term.
In addition, AX 2012 allows write-offs directly from the Customer form.
Deductions Setup and processing
Deduction types are set for various type of deductions that customers might use. Navigation: Trade allowance management > Setup > Deductions > Deduction types
The Deduction offset is an account to post the deduction amount.
Deduction Denial Reasons
Deduction denial reasons describe the various situations for rejecting a deduction in the deduction workbench.
Navigation: Trade allowance management > Setup > Deductions > Deduction denial reasons
Deduction Write-off reasons
Write-off reason codes are for allowing the deductions to be written off (accepted). The maximum write-off amount and Main Account for posting the adjustment to are defined, too.
Navigation: Trade allowance management > Setup > Deductions > Deduction write-off reasons
Deduction Journal name
To use a Journal name for deduction transactions, go to Trade allowance management > Setup > Trade allowance management parameters
After the setup is complete, tracking the deduction is now possible.
Case 1: Process Deductions at Payment
An open invoice exists for the customer for $104,213.20.
– A payment came for $104,200 and an AR Payment journal is created, the invoice to be paid is selected on the journal line. The payment amount is entered in the credit column. When the amount is less than is posted on the selected invoice, a warning is displayed:
– To enter the short pay amount, click on the Deductions menu button:
– The Deduction form opens, click on the New button:
– The Deduction ID is assigned from a number sequence, select the Short pay type, and enter the short pay amount in the Amount column. Multiple records can be entered to justify the short pay.
– At closing of the Deduction form, a line is inserted on the payment journal with the pre-defined ledger account in the Offset column to post the short pay:
– Validate and post the Payment journal. The invoice is settled. See deductions on the workbench.
Navigation: Trade allowance management > Common Forms > Deduction Benchmark
In this form, you will see all of the deductions that have been recorded. You can Split the deduction, Deny the deduction and return it to the customer account, or Write-Off the deduction as a valid deduction. A deduction line cannot be deleted form the workbench.
A deduction is in:
- Status Created as soon as Deduction line is generated in a Payment journal before posting. The status Created can be updated to Open or Closed.
- Status Open after the Payment journal is posted. The status Open cannot be changed manually.
- Status Closed after the deduction is written off: click on Write-off button and select a reason code.
Click OK on the top bar.
– Closed deduction can be reversed back to the status Open. The Deduction events tab will have all records of denial/write-off and reversal:
– Deductions cannot be deleted when they are closed
– A General journal with the description Deduction journal is generated and ready to be posted from General ledger.
Case 2: Unsettled small amounts
– A number of small invoice balances exists for a customer.
– If a payment journal is created, invoices are selected one by one for payment but zero amounts are entered. Then deductions are entered as shown above for each invoice separately. The journal will have 4 lines with zero amounts and 4 lines automatically inserted when a deduction is entered.
– However the payment journal posting throws an error because the zero lines are not allowed to be posted.
– Therefore, the amounts cannot be processed using the payment journal as in the case 1.
– The small amounts can be written off without using the deduction functionality. Navigate: Accounts Receivable > Common > Customers > highlight a customer record > Customer balances on the Action pane > Collections.
– On the Collections form, mark the transactions for write-off.
– Click on the Write-off button on the lower pane, enter a date and a reason for the write-off. An Infolog is thrown with the General journal number generated for the write-off.
– The General journal is generated for the total amount to be written-off.
– Before the General journal is posted, all transactions included in the write-off are listed under Inquiries > View marked transactions.
– After the General journal is posted, the line is removed from the Collections form and no marked transactions are visible from the Inquiries.
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