Vendor credits, short pays and duplicate payments
Credit memos against a posted bill, a $17,500 short pay, and a $6,000 duplicate payment, with the journals that unwind each without editing the record.
A bill does not only go down when it is paid. A vendor's credit memo can reduce it, and a payment can overshoot it. A buyer's debit memo is the other side of the same paper: it tells the vendor that the buyer is reducing the account, for goods returned or a shipment that came up short. The vendor answers with its own credit memo. In Northwind's books the entry is the same either way, and the original bill is never edited. It stays on the record, and the credit sits beside it.
Take the short, over-priced bill from the three-way match lesson: 360 drills billed at $51, when 350 arrived and the order said $50. The vendor billed $18,360; $17,500 is owed. Many teams post the bill at what the vendor billed, so the books agree with the vendor's invoice number, and let a credit memo bring it down to what is owed.
Drill bill as invoiced
| Account | Debit | Credit |
|---|---|---|
| 1300Inventory | 18,360.00 | |
| 2000Accounts payable | 18,360.00 | |
| Balanced | 18,360.00 | 18,360.00 |
The bill, posted at what the vendor billed.
Credit memo against the drill bill
| Account | Debit | Credit |
|---|---|---|
| 2000Accounts payable | 860.00 | |
| 1300Inventory | 860.00 | |
| Balanced | 860.00 | 860.00 |
The vendor's credit memo for the shortage and the price. Inventory comes down to what actually arrived, at the agreed price.
The vendor's account now shows $18,360 billed, $860 credited, and $17,500 to pay. If Northwind does not want to wait for the memo, it can pay the $17,500 owed, tell the vendor in writing why, and leave the $860 open and marked disputed. That is a short pay, and it works only when the dispute is documented before the payment goes out.
Four accounts, four positions
The last two rows are the interesting ones. Both are overpaid: the vendor holds Northwind's money. A debit balance with a vendor is not a payable. It is a refund to chase or a credit to use, and it should never sit inside the total of what Northwind owes as if it were a smaller liability.
A payment made twice
The commonest way to make a duplicate payment is a reminder. The drill vendor emails a copy of the invoice, someone enters it again under a slightly different number, and the next run pays $6,000 that was already paid. The bill screen should have caught it before it posted, by checking the vendor with the vendor's invoice number and then flagging the same vendor and amount a few days apart. When that fails, the payment is made, and the books have to say so.
Second payment of the drill bill
| Account | Debit | Credit |
|---|---|---|
| 2000Accounts payable | 6,000.00 | |
| 1000Cash | 6,000.00 | |
| Balanced | 6,000.00 | 6,000.00 |
The duplicate payment, as the bill-pay tool books it. Account 2000 now has a $6,000 debit balance for this vendor.
Vendor refunds the duplicate payment
| Account | Debit | Credit |
|---|---|---|
| 1000Cash | 6,000.00 | |
| 2000Accounts payable | 6,000.00 | |
| Balanced | 6,000.00 | 6,000.00 |
When the refund arrives, it clears the debit balance. It is not income.
Reclassify the vendor's debit balance
| Account | Debit | Credit |
|---|---|---|
| Receivable from vendor | 6,000.00 | |
| 2000Accounts payable | 6,000.00 | |
| Balanced | 6,000.00 | 6,000.00 |
If the refund is still outstanding at month end, move the debit balance out of payables so it is not netted against what is owed to other vendors.
Wrong
Dr 1000 Cash 6,000 Cr Other income 6,000 The vendor's debit balance never clears.
Right
Dr 1000 Cash 6,000 Cr 2000 Accounts payable 6,000
A refund of money Northwind paid by mistake is not income, and it is not a reduction of an expense. The payment settled a payable that was already settled, so the refund puts the vendor's account back to zero.
Step 1: Ask the bank first
Call the bank the day you find it and ask what recall options exist for that payment method. They are time-limited.
Step 2: Tell the vendor, in writing
Email the vendor with the invoice number, both payment dates and the remittance advice. Ask whether they want to refund it or hold it as a credit.
Step 3: Check where it landed
Check the vendor's own statement. The vendor may already have applied the second payment to another open invoice, and then it is not a refund at all.
Step 4: Choose refund or credit
Take the refund, or apply the credit to the next bill. Put the credit memo number and the invoice it applies to in the memo.
Step 5: Fix the cause
Find out why the duplicate got through: a copied invoice number, a second vendor record, or a payment made outside the tool. Close that gap, not just this one.
A vendor account has three numbers: billed, credited and paid. When paid is the biggest, the vendor owes you, and it belongs on the books as a refund to chase.
Finished this lesson?
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- US GAAP
- ASC 405 (opens in a new tab)LiabilitiesFree after registration
- ASC 210 (opens in a new tab)Balance SheetFree after registration
- Background reading — not an authority
- Wikipedia, “Accounts payable” (opens in a new tab)Accounts payableFree to read
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Accounts payableWhat we owe vendors for bills already received
- BillA claim against us
- SubledgerThe detail, by customer, vendor or asset, whose total must equal its control account in the GLConvention
- Control accountA GL account whose balance is the total of a subledger — AR, AP, fixed assets — and is posted only from itConvention
- ReversalAn offsetting entry that undoes a posted entryConvention
- Remittance adviceThe payer's note of which invoices a payment covers and of any deduction taken — the first thing cash application readsConvention
- ExceptionA break requiring investigation
- Vendor creditA vendor's reduction of what we owe — a return, an allowance or a price correction — recorded as a negative bill that lowers accounts payable. The vendor calls it a credit memo; the document we send to request one is a debit note
- Vendor debit balanceA vendor whose account stands in our favor — a prepayment, an overpayment or a credit not yet used. It is presented as an asset (a vendor receivable or prepaid), not netted against other vendors' payables
- Duplicate paymentThe same obligation paid twice — typically one invoice entered twice, or paid once by check and again by ACH. Found by matching vendor, invoice number and amount, and recovered by a vendor credit or a refund, not by editing the payment
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Procure to pay (AP)The payables stack from requisition to reconciliation: requisition → PO → receipt → bill → approval → payment → reconciliation.
- Controls & auditAccounting software is a system of controls, and most of them are enforced in the UI: segregation of duties, approvals bound to a version, an append-only audit trail, and evidence attached wherever an auditor will ask for it.
- Duplicate paymentsSame vendor, same amount, close in time. Or the same reference on any date.
- Journal entry for accounts payableWhen an approved vendor bill is entered, debit the expense or asset it bought and credit Accounts payable. When it is paid, debit Accounts payable and credit Cash.
- Journal entry for an inventory purchaseWhen inventory is bought on credit under a perpetual system, debit Inventory and credit Accounts payable. If an early-payment discount is taken, debit Accounts payable for the full bill, credit Cash for what is paid and credit Inventory for the discount.
- Accounts payable process for startups: intake to paymentHow a bill moves from inbox to paid: intake, coding, approval, scheduling and recording, plus AP aging and who approves what at a 10-person startup.
- BillRegisterAging and approval state.
- DuplicateBillAlertBlocking. Duplicate payment is one of the most common AP losses.
- BillDetailSource document inline beside the coding.
- VendorMasterBank details versioned, never overwritten.