Here’s a table of the debits and credit flows for an overpayment where someone has paid you too much (over and above what you invoiced them) for something. It’s good to see what the ins and outs are in the accounting system when something like this happens.

The example we’ll use is for an overpayment (too much money received – not that that’s a bad thing!) of $55 inclusive of GST a customer made to us and that we’ll apply or allocate to their next invoice. That means, instead of doing a refund, we’ll just reduce their invoice when they next order.

The concept of this is similar to when you buy something at the shop and you return it for a particular reason and the store gives you store credit which you can then use to get some money off the next purchase.

Anyway, there are four stages:

• Adding an overpayment.
  
• Creating the invoice.
  
• Applying the overpayment to that particular invoice.
  
• The customer then pays the reduced invoice.
  

Things to note:

• T-accounts is just a name for accounts that hold debits and credits.
  
• If you don’t know what accounts payable or accounts receivable is, then just check out the post on this topic. Click on the magnifying glass on the top right hand corner.
  
• The balance of the account shows the cumulative amount from the first step to the last. It’s the carry forward difference between the credit and the debit amount for the particular account.
  

If you can’t see the below tables, there’s also an image of the tables at the bottom.

1. Adding the Overpayment
   | Account | Debit | Credit | Balance of the account |
   | —————————– | ————– | ————- | ——————————- |
   | Cash | 55 | | 55 DR |
   | GST | | 5 | 5 CR |
   | Accounts Payable | | 50 | 50 CR |

2. Creating the Invoice
   | Account | Debit | Credit | Balance of the account |
   | —————————– | ————– | ————- | ——————————- |
   | Sales | | 100 | 100 CR |
   | GST | | 10 | 15 CR |
   | Accounts Receivable | 110 | | 110 DR |

3. Applying the overpayment to the invoice that you created to reduce it’s balance.
   | Account | Debit | Credit | Balance of the account |
   | —————————– | ————– | ————- | ——————————- |
   | Accounts Payable | 50 | | 0 |
   | GST | 5 | | 10 CR |
   | Accounts Receivable | | 55 | 55 DR |

4. Customer pays the reduced amount of $55 shown on the invoice, but notice that the total cash paid is $110 as per the full invoice. This is because we used the $55 overpayment to allocate to this invoice.
   | Account | Debit | Credit | Balance of the account |
   | —————————– | ————– | ————- | ——————————- |
   | Cash | 55 | | 110 DR |
   | Accounts Receivable | | 55 | 0 |

Did you notice that the entries for the overpayment were similar to the prepayments and the main difference in in the account where revenue received in advance (RRA) is instead accounts payable. Why? Because the money that we have received as an overpayment is actually owed back to the customer, that’s why it’s in accounts payable.

What happens if the overpayment is the other way, so you’ve paid a supplier more than what you meant to. Thing like this do happen for example, putting in an additional xero, so instead of paying $10, you paid $100. All that happens is that the debits and credits switch around and accounts would be different in that accounts receivable would instead be accounts payable.