AP vs AR Debate Needs Settling

Carl83

I am an AP manager and have a debate with my companies AR manager that needs settling. We operate a number of hotels and work in our head office, my team pay internal invoices to our AR team (that's another story) but our debate is around allocating credit notes.

On occasion we pay invoices before we have received a credit note against it. Our AR team immediately allocate the credit to the invoice, meaning when we pay it leaves an unallocated cash credit in the sales ledger. Our AR manager claims this is good practice and the correct way to do things, stating that if the credit isn't allocated straight away then the revenue has not been offset.

My argument is the revenue will be offset the moment they raise the credit note and not when it is allocated. More importantly my argument is the credit should not be allocated until it appears on the remittance and that the full payment should be matched against the whole invoice (not the offset amount) citing that both ledgers should match.

Our AR want to match credits to invoices immediately, I believe they should be left unmatched until they are used and visible on the remit. In the situation of an invoice being paid in full before the matching credit is used, I believe the credit note should be left unallocated he wishes to leave an unallocated cash balance. Who is right and who is wrong is this case? Or is this down to discretion? Also, can someone clear up the debate regarding the revenue as I feel the revenue is adjusted when the credit is raised not when it is allocated.

He has called over to discuss the fact that after we cleared up our account, a credit note was then raised and he's unhappy that he now has unallocated cash as the invoice had already been paid and matched to the invoice. I told him his ledger should match mine and that we should both show the credit note as unallocated as a dr on my ledger and a cr on his.

Thanks in advance.

CeeJaySix

Agree both ledgers should show the same balance, though not necessarily the same way of getting there.

Also agree that it is the raising of the CN that offsets revenue, regardless of whether it is allocated.

As you're talking about internal transactions it is easy enough to process in the same way (and I would for neatness as much as anything else - makes reconciliations a lot easier). However, consider if it were an external supplier: they may allocate the CN against the invoice to which it relates, even if already paid in full; they will then allocate the excess cash against the invoice which you remit as including the CN, although that may be a later invoice which has nothing to do with the CN. Perfectly acceptable, and by the sounds of things what your AR team are doing.

Neillaw

I think that your AR team are more concerned with having their own clean ledger as against best practice.
The question is who's the customer?
As you are the customer the AR team should wait until you remit your payment and then allocate credit notes against the invoice. However you may need to find out if this causes an internal reporting issue within the AR department.
I think this is something you may have to sort out between yourselves and reconcile the ledger at balance level as against transaction level.
I would also suggest that they look at reducing the amount of credit notes raised so this problem doesn't arise.