How to Deal With Overpaid Invoices
Definition
An overpayment refers to the situation where the supplier is paid more than the billed or invoiced amount. In other words, the customer has paid an excess amount in comparison to what they were supposed to pay in line with the invoice. Here, the customer has made the error.
Example
Take the example of when an invoice is received from a corporation amounting to $495 for a recent inventory purchase. If the customer has made an error while making the payment and has accidentally paid $549, then there is a mistake of paying an excess amount of $54 ($549 - $495). This is known as an overpaid invoice.
What are the Reasons for an Overpayment on the Invoice?
Following are some reasons for an overpayment:
Incorrect invoice total (escalated value)
There may be an error on the invoice while calculating the total. So, you may be making a payment by concentrating on the total, instead of recalculating the total. This type of error can generally be expected when the seller uses a manual invoicing mechanism. To avoid this, this situation can be helped by recalculating the total.
A glitch in the payment system
A glitch in the payment processing system may lead to an excess or double payment of the same invoice. Although the customer has paid, the payment system has erroneously processed the same invoice twice or more. This leads to an excess or overpayment.
Duplicate payments
Sometimes the same invoice may be paid more than once. This might be due to some error, some misunderstanding or any other understanding gaps.
Weak internal controls
Often times, the implemented controls may not be able to indicate whether a specific invoice has been paid or not. Hence, there might be some misunderstanding which then leads to an overstated amount in terms of payment.
How do you Handle Overpayment of the Invoice From the Customer's Perspective?
If an overpayment has been made to the seller, due to some error or understanding gap, the following steps to be taken, will prove useful:
Verify your claim with supporting documents
Collect all supporting documents that can verify your claim. For example, you can collect the bank statements which highlights the overpayment as well as gathering the relevant invoice. Review the total payable on the invoice and compare it to the amount paid on the bank statement. This is so that before proceeding, you will be confident and sure that you have paid more than the amount that was billed or invoiced.
Communicate with the seller / vendor
The next step is to politely communicate the situation with the seller or vendor. This will involve calmly explaining to them that you have paid an excess amount in comparison to the invoice received. An explanation of why this happened will enable the situation to be clear to the supplier. For example, the overpayment may be due to some misunderstanding that resulted in the payment of the same invoice more than once.
So that the supplier will understand the discrepancy, it is helpful to send the bank statements and relevant invoices to them to facilitate the supplier and to enable them to investigate the matter.
It is also advised to express gratitude and to remain calm, positive as well as professional and thankful when you are requesting prompt action from the supplier.
Receive the funds back from the seller / vendor
If you have paid in excess, the supplier is obliged to make the repayment. However, if there are transaction costs for making the repayment, this falls on you.
There are two alternatives for receiving the cash back:
Receive a credit on your next bill
If you make frequent purchases from the particular supplier then receiving a credit on the next bill can be a good option. It is a simple process to get an adjustment of the credit in the next bill. Businesses often prefer to adjust excess payments in the following bills as it helps to minimize any bank charges that are charged when executing transactions.
Get the adjustment against the balance
If you have some other payables balance for the same supplier the amount can be adjusted.
It will all depend on the mutual understanding between the seller and the buyer on whether the customer would prefer a refund or prefer to adjust the credit in the next bill or if some other balance can be adjusted.
In any of the above situations, it is still important to express gratitude and to be thankful as the problem is resolved.
Consider legal advice
There may be situations where you are unable to recover your funds, even despite multiple follow-ups and calls. In this circumstance, you may have no choice but to consider seeking legal advice to rectify the situation. However, this option should be used as a last resort and should only be exercised if you have no other options.
How do you Handle Overpayments in Accounting From the Customer's Perspective?
The accounting treatment depends on whatever way was agreed to resolve the matter. Let us discuss the accounting in all these ways:
In the case of cash receipt
If cash is received back from the seller, the following journal entry is posted in the books.
Description Debit Credit Cash XXX Accounts payable XXX The debit impact of this entry, is to record cash in the books. The credit impact is a re-creation of the accounts payable. This is because the balance was debited in excess when the supplier was paid extra. So, the credit impact restores the overall accounts payable to its accurate balance. (This above entry is only recorded if you had already debited the accounts payable while paying the excess amount)
In the case of getting adjustment against past bills
If you had debited accounts payable while paying an excess amount, there is no need to post additional accounting entries. However, you may need to mark the invoice as paid to partially paid for which the adjustment was agreed. This helps to keep the invoice breakdown of the payables balance and this is considered an essential element of a transparent accounting record.
In the case of getting adjustment against future bills
If the customer decides to receive an adjustment against future bills, the following journal entry is posted in the books.
Description Debit Credit Prepaid expense/asset XXX Accounts payable XXX The debit impact of this transaction is the creation of prepaid expense or asset, as the overpaid amount is to be adjusted in the next bill. Once the bill is received from the seller, the prepaid expense or asset will be removed (credited). On the other hand, the credit impact restores overall accounts payable to its accurate position because this amount was debited in excess due to overpayment.
Email Template Letter for Overpayment of the Invoice (Customer’s Perspective)
Dear {Name of the supplier},
I am writing this email to communicate that there has been some discrepancy in the recent payment that we have made to you against invoice # {XXX}.
Here are the details of the overpayment, and supporting documents are attached.
Invoice number: {XXX}
Total invoice amount: {AAAA}
Amount paid: {BBBB}
Date of payment: {DATE}
Overpaid amount: {CCCC}
I believe this discrepancy has been due to an error in our payment processing system. Therefore, you are kindly requested to take prompt action and reply with available options such as a cash refund or by applying the overpayment as a credit in the future bill.
I appreciate your prompt action on this matter and expect a quick reply in order to resolve this matter and get a correction of the account.
I am grateful and would like to thank you for all of your cooperation and understanding on this matter, and I am open to discussion if there is something that you have in mind.
Thank you again, and I look forward to hearing back from you.
Best regards,
{Your name}
{Your post in the company}
{Your company name}
Next will be a discussion on how to handle an overpayment from the seller’s perspective.
How do you Handle an Overpayment of the Invoice From the Seller's Perspective
As discussed, when the customer has paid more than the billed or invoiced amount, this situation is known as an overpayment. So that there will be no impairment in the working relationship with the customer, this situation needs to be dealt with professionally and as amicably as possible.
The following outlines the steps necessary to handle an overpayment situation:
Verify your claim with supporting documents
The first step in dealing with overpayments is to review all supporting documents such as purchase orders, delivery notes, invoices as well as bank statements to ensure that the excess payment was in fact received in comparison with what should have been received. Once you are confident about the overpayment, the next step will be to communicate with the customer.
Communicate overpayment and clarify options available
It is best to promptly inform the buyer about the excess amount received in the recent payment. The communication should be fast and polite while evoking a mood of gratitude and expressing that you value them as a customer.
It is also recommended to provide alternate options for making the refund. For example, some common options provided can be as follows:
- The excess amount can be adjusted in the future bill.
- The excess amount can be adjusted against the past receivables balance (if applicable).
The choice of method is dependent on the customer.
Initiate the refund process
If the customer has opted for a refund, then the refund process should be executed in a timely manner and the payment deadline should be communicated. Then stick to this deadline. The need to ensure that the customer is paid within the agreed time is to uphold your reputation as a supplier, otherwise it may lead to questions about your credibility.
On the other hand, if the customer has opted for an adjustment, then this will need to be approved by the appropriate manager and the credit should be processed as and when needed. Likewise, it is important to ensure that all the facts are properly documented.
Document the process & be grateful
It is important to ensure that all the correspondence and facts are appropriately documented. This should occur whether the customer opts for a cash refund or an adjustment in the future or past balance. The reason for this is that it helps to ensure efficient execution of tax and financial audits.
It is also advised to be grateful to the customer for the business relationship that you have with them. If there is a delayed response, or hard attitude or even lingering payment, this might frustrate and irritate customers, which in turn may lead to loss of future business.
Once the matter of overpayment is resolved and agreed upon, the next step is to deal with the accounting.
How do you Handle an Overpayment in Accounting From the Seller's Perspective?
The accounting treatment is dependent on whether the customer has agreed to receive a cash refund or has decided to have the overpayment adjusted against some past/future receivables. Next to be discussed, will be the accounting treatment for both these situations.
If the customer has agreed to receive a cash refund
The following journal entry is posted in the accounting books if the customer has agreed to receive the cash refund.
| Description | Debit | Credit |
| Accounts receivable | XXX | |
| Bank/Cash | XXX |
The debit impact of this entry creates accounts receivable, which was reduced due to the overpayment (this is assuming that the accounts receivable was credited with excess payment). Once receivable is debited with the excess amount, the overall balance returns to the accurate amount. On the other hand, the credit impact records repayment of the funds that were received in excess.
If the customer has agreed to adjust overpayment in the future bills
In this case, if the customer has agreed to adjust the overpayment balance in future bills, the following journal entry is posted in the accounting books.
| Description | Debit | Credit |
| Accounts receivable | XXX | |
| Advance from customers | XXX |
The debit impact of this entry creates accounts receivable, which was reduced because of the overpayment. So, we need to debit this excess amount to reach the overall accurate account balance. On the contrary, the credit impact is the creation of a liability account called advance from customers (liability). This account is to be settled when the next invoice is created for the customer.
This option is generally exercised when the customer does not have an existing or past receivable balance.
If the customer has agreed to adjust overpayment in the existing or past receivables
In this case, if the customer has agreed to adjust the overpayment in the existing or past receivables amount, there is no need to post an adjusting entry. However, you will be required to mark the existing or past invoice as paid or partially paid, depending on the extent of the overpayment and the amount of the existing or past balance invoice.
Overpayment Email Letter Template (from the Seller's Perspective)
Dear {Customer’s name},
This email intends to communicate that it has come to our notice that you have made an excess payment for the invoice # {XXX}.
Here are details of the overpayment,
Invoice number: {XXX}
Invoice amount: {AAAA}
Invoice date: {DATE}
Payment amount: {BBBB}
Payment date: {DATE}
Overpayment amount: {CCCC}
Please be assured that your amount is safe with us, and we are obliged to make repayment as this amount has been received in error. However, you can opt to adjust this balance against future bills as you have been a recurring and valuable customer for us.
You can opt for any of the following options for resolution of the above matter:
- Receive a refund: You can opt to receive the funds back. We will make sure to initiate the return process once you confirm. However, you will be required to bear the transaction cost.
- Apply this excess amount in future invoices: You can elect to classify this amount as an advance, and it can be adjusted in the next bill that we send you.
- Apply this excess amount to the existing/past invoices: You can also opt to adjust this overpayment with the past invoices we have.
Thank you!
{Your name}
{Your post in the company}
{Your company name}
Conclusion
An overpayment is the situation when a customer makes a payment that is more than the requested payment amount on the invoice of bill. Both the seller and buyer can identify this situation and there may be many reasons for an overpayment. Such reasons include, but are not limited to, glitches in the payment system, misunderstandings, the wrong invoice total, duplicate payments, weak internal controls, among others.
If a supplier receives an overpayment, they are obliged to make the repayment as a refund or adjustment. If the customer opts for an adjustment, this excess amount can be adjusted in the next bill, subject to the customer’s approval.
As a seller, if this situation of overpayment occurs, it is important to ensure that it is dealt with professionally and that the matter is resolved on a priority basis so as to preserve the excellent working relations with the customer.
Similarly, as a buyer, if this situation occurs, there is no need to panic but the situation should be faced diligently and the communication with the supplier should be as professional as possible.
Frequently Asked Questions
Should the seller pay back the overpayment?
Generally, the answer to this question is “yes”. The seller should pay back the overpaid amount to the customer as they do not own the excess amount. Another alternative, if both the customer and vendor agree, is to adjust the excess amount in future bills. Choosing this alternative will help to avoid transaction costs for the repayment and also subsequent purchase billing.
What happens if the invoice is paid twice?
If an invoice is paid twice, this situation is also termed as an overpayment. If this situation arises, it will need to be resolved on a timely basis by notifying both parties. There are two options to resolve this situation to get a settlement and the choice of option is dependent on the mutual understanding between the seller and buyer.
The first option is to make a repayment, which means that the seller is required to pay back the funds. The second option is to adjust the excess amount in the next bill or past balance (if applicable).
An overpayment situation indicates a signifiant weakness in the payment controls implemented by the customer. In order to rectify the matter, there is a need to evaluate the payment processes to ensure that any gaps are filled which previously resulted in such massive misstatements.
What types of controls can be implemented to avoid overpayment from the customer’s perspective?
The following controls can be implemented to avoid an overpayment situation from the customer’s perspective:
- The invoice, once paid, should be marked as "paid". By doing this, there will be no confusion about whether the invoice was paid or not.
- The invoice must be attached with a payment voucher. The reviewing authority should then compare the total on the invoice with the payment. If a partial payment is made, this should be mentioned on the invoice.
- A payment voucher should accompany the purchase order. The reviewing authority must then compare the total on the purchase order with the invoice. This helps to ensure that the exact amount is paid as in the supporting documents.
- It may be a worthwhile idea to automate the billing and payment processing system. Such a system will make sure that any discrepancy is identified in a timely manner without any manual intervention in the system.
Furthermore, billing and payment controls such as authorization protocols, rigorous payment approval processes, regular reconciliation, supplier audit, and an overall better control environment can help to avoid situations such as overpayment.
In what ways can you detect that you have made an overpayment on the invoice?
The following methods can be helpful in detecting overpayments in invoices:
Reconcile the payments with the purchase order record
It is recommended to review and reconcile purchase orders, invoices, and delivery notes for payment transactions.
Timely reconcile the bank statement
By regularly reconciling the bank statement, it will help to ensure that all payments made to the vendor are based on some purchase or expense accounting entry. In the event that some payments remain untraceable in the accounting ledger, this may signal a need to investigate the discrepancy.
Establish internal audit functions on purchases, payables, and payments
The internal audit function needs to thoroughly go through processes and controls to assess if there are any gaps. This means that recommendations can be made accordingly. The fulfilment of the control gaps helps to enhance the quality of not only financial transactions and records, but also helps to improve operational performance.
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