How to Apply a Customer Credit to an Invoice

Set up your Accounts:

Ensure your Chart of Accounts includes the following three accounts:

- Accounts Receivable (Asset) – Tracks how much your customers owe you.
- Customer Credit (Liability) – Tracks overpayments or prepayments from customers. You might also name it Customer Overpayments or Customer Deposits.
- Sales/Revenue (Income) – Records the income you earn from selling products or services.

Record an Overpayment:

Let’s say you issued an invoice, but the customer accidentally paid more than the invoiced amount. To record this:

1. Debit the Bank Account for the amount received.
2. Credit Accounts Receivable for the original invoice amount to clear it.
3. Credit the Customer Credit account for the excess amount, as it represents an overpayment or prepayment.This tells the system: “We received more than the invoice amount  we now owe the customer the overpaid amount in goods or services.
4. Apply the customer credit to a new invoice

Now, you create a new invoice for a portion of the total amount due. Instead of asking the customer to pay the full amount, you apply the existing credit:

1. Debit the Customer Credit account for the amount being applied to the new invoice.
2. Credit Accounts Receivable for the same amount, reducing the customer’s outstanding balance.

This ensures the customer only needs to pay the remaining balance on the new invoice.

When the Customer Pays the Remaining Balance Due:

1. Debit the Bank Account for the payment received.
2. Credit Accounts Receivable to clear the balance on the invoice.

This finalizes the transaction, and the invoice is fully paid.