Accounting for overpayments

Have you ever had a client overpay an invoice? In this situation, you have two options: you can refund them the difference, or you can apply that overpayment towards future services. If you want to apply those funds to future invoices, how you bookkeep that will depend on several factors. We’ll break it down below.

My client paid me an intentional deposit

If you provide your client with ongoing services and invoice them on a regular schedule, your client may choose to pay several invoices in advance.

The easiest way to reflect this is by splitting the payment to record it against future invoices. If you’d planned to invoice your client $1000 per month from April to June, for example, but your client has paid you the $3,000 upfront in April, the first step is to make sure you’ve created the three invoices, one for April, May, and June.

When the payment is recorded or imported from your bank connection, split the payment into three and record each split transaction against the related invoice.

My client paid me an intentional deposit

If you provide your client with ongoing services and invoice them on a regular schedule, your client may choose to pay several invoices in advance.

The easiest way to reflect this is by splitting the payment to record it against future invoices. If you’d planned to invoice your client $1000 per month from April to June, for example, but your client has paid you the $3,000 upfront in April, the first step is to make sure you’ve created the three invoices, one for April, May, and June.

When the payment is recorded or imported from your bank connection, split the payment into three and record each split transaction against the related invoice.

My client overpaid me with cash or cheque

You sent your client a $900 invoice and they paid you $1,000 by cash or cheque, or through a payment processor outside Wave. $900 applies to the invoice payment, but you have an additional $100 you need to figure out what to do with.

Let’s take care of the invoice payment first:

Add a $1,000 income transaction to the bank account where you received payment (or locate the income transaction, if you have your bank account connected to import transactions). Split the $1000 income transaction into two: one for $900 and one for $100.

Apply the $900 transaction as payment to the invoice. The invoice is now fully paid and correctly accounted for.

So, what do you do with the $100?

You have three options:

  1. Refund your client. Simply cut them a cheque, or return the funds any other way you choose. Add an income transaction for the amount you are refunding (-$100, in this example) to keep your bookkeeping and your bank balance correct.
  2. Apply the money to another open invoice for your customer, if one exists. This is as simple as marking the transaction as an invoice payment against that invoice.
  3. Hold the funds against a future invoice (a credit for the customer).

Let’s look at how you hold funds against a future invoice.

If it’s the first time you’ve done this, you’ll need to create a liability account to act as a customer deposit/overpayment account.

When you create this account, make sure you uncheck the payment account box.

Now, categorize the remaining $100 to the customer deposit liability you’ve just created. This indicates that you’re holding this money on behalf of a client*, to apply against future services, which is the most accurate way to bookkeep this situation.

*Wave doesn’t know which client you’re holding the money for, so you’ll need to either create a separate liability account for each customer who overpays you, or maintain a separate record in a spreadsheet or notebook that breaks down the total of any overpayments by customer.

As so often happens with bookkeeping, there are multiple ways to get to the same outcome. One simple solution here is when you next invoice your customer, to simply go into the transaction that you split and change the $100 from your customer overpayment account to a payment against the new invoice. You may want to avoid this, however, if the timeframe between the overpayment and the next invoice crosses into the next month, as it will make reconciliation difficult.

My client overpaid me, and I use Payments by Wave

In this case, there’s one extra step: you’ve first got to get that overpayment off the invoice!

You have a few options:

Within 90 days, you can refund your client the overpayment and Payments by Wave will take care of everything. This will also save you any processing fees on the refunded portion of the payment.

If your client doesn’t want a refund and prefers you to put the extra money towards another invoice or future services, you need to reduce the amount of the invoice payment to get everything to balance. Invoice payments for Payments by Wave are created automatically by the system. That means they're not editable, so you’ll need to remove the payment entirely, and re-apply it.

View the details of the invoice payment, and note down important details, including:

  • The amount paid
  • The payment date
  • Any reference
  • The bank account into which payment was received.

On the Invoice page, remove the payment.

On the Transactions page, create an income transaction for the full amount paid, on the date you noted down above, and follow the identical steps detailed above for overpayment by cash or cheque.

You’ve accounted for the situation, and your books reflect the reality, which is that you’re holding $100 to be paid against a future invoice!

How do I apply these funds to future invoices?

When you invoice your client in the future, create the invoice as normal, but before you send it, record a partial payment to reflect the funds you received before.

Now, there’s no way to directly apply money from the Customer Deposit/Overpayment liability account to an invoice (you could create a journal transaction between the liability account and Accounts Receivable, but that wouldn’t match to the specific invoice). So here’s the solution:

Let’s imagine your next invoice is for $500.

Access the invoice and add a payment, for the amount of the earlier overpayment that you are now applying to this new invoice ($100, in our example).

Set the payment account as Undeposited Funds.*

*An "Undeposited Funds" account is an imaginary payment account that you can use to track the detail of transactions without confusing what goes into and out of your real bank account(s). You create an Undeposited Funds account exactly the same way you would create any other bank account in Wave, under your Chart of Accounts. You can create your Undeposited Funds account as any type of bank/cash account, but "Other Bank" probably makes the most sense.

We now have $100 income in our Undeposited Funds account that doesn’t really exist. The customer hasn’t really just paid us. We need to balance this by transferring the money from our Customer Deposit/Overpayment account.

On your Transactions page, add a new expense transaction for $100. Set the payment account to Undeposited Funds*, and categorize the transaction as Customer Deposit/Overpayment.

If you are holding overpayments/deposits for multiple customers in a single liability account, then update your external spreadsheet or notebook to record that you have used up the overpayment for this specific customer.

After following these steps, you have used up the customer’s overpayment, by applying it against the new $500 invoice, leaving $400 for the customer still to pay. Your Undeposited Funds account has zero balance, which it always should. Congratulations! You've properly accounted for all types of overpayments.