Pastel Payment Terms, Ageing, Open Item, and Balance Forward
Pastel Accounting Partner and Xpress gives you sophisticated flexibility in determining how you wish to control customers and suppliers from the point of view of receipt management. Although the discussion emphasises customers, the same principles apply in terms of managing payment of debt to your suppliers.
This topic should help you to understand how you can use Pastel Accounting Partner and Xpress capabilities to effectively control your customers' debt or your debt to others. However, we will use customers as an example in this topic.
In this topic we explain the following concepts:
· Payment Terms
· Open Item and Balance Forward Processing.
When you create individual customer accounts, you choose different methods of payment terms, as well as whether to use open item or balance forward processing.
You should not confuse normal payment terms with early payment terms, which are special additional discounts you can give to customers if they pay you within a specified time.
Payment terms normally apply to sales on credit. You establish the period within which you expect your customer to pay you.
It is important to establish payment terms with customers because you want to know when your customer is overdue on their payment to you, so that you can chase up the outstanding amounts. You can run overdue reports to see which customers have not yet settled their accounts. From these reports you can initiate collection measures or even charge interest for late payment. Payment terms can be monthly terms or day based terms. We will look at each in turn.
These terms are based on financial periods. There are five of these terms called:
· 30 days
· 60 days
· 90 days
· 120 days.
If you offer current terms, the customer has to pay in the same month in which they are invoiced. Amounts which are unpaid and are more than one month old, are overdue. If you offer 30 day terms, the customer has to pay in the month after they are invoiced. Amounts which are unpaid and which are two or more months old are overdue, and so on.
Day Based Terms
These terms are based on days. The days are usually from the date of the invoice. For example, you can give a customer terms whereby he should pay you within seven days from the date of the invoice. If the customer does not pay you within this time frame, they are overdue.
You have to create your own day based terms, which you do in the Edit...Terms...Normal Payment Terms menu option.
You can also create a terms code which is a mixture of day based and period based, although this is not used very often. To do this, you specify that an invoice is due a specified number of days after the end of the period. If you use this kind of terms code, then the invoice due date is calculated exactly. However, overdue terms switch to being monthly terms from then on.
The status of a customer's overdue amounts are measured in the same lengths as the terms. Pastel works to a maximum of five terms. If a customer's terms are seven days from date of invoice, then their terms are:
· 1 - 7 days Terms
· 8 - 14 days Terms + 1
· 15 - 21 days Terms + 2
· 22 - 28 days Terms + 3
· 29 - 35 days Terms + 4
This breakdown of outstanding amounts is called a customer's ageing. Whatever a customer's terms are, they print on the customer's statement.
You can print various useful reports which show ageing and overdue information:
· The age analysis report shows the aged balances as it appears on the customer's statement
· The overdue report only shows customers whose amounts are overdue.
Open Item and Balance Forward
There are two different ways of determining the ageing, in other words, the breakdown of outstanding amounts per terms period. These are:
· Open Item
· Balance Forward.
You set this method for each customer separately.
With this method, Pastel Accounting Partner and Xpress looks at each individual invoice for a customer, and uses the invoice date to determine whether it is due or not.
This is a very accurate method, but it does have a downside. In order for this method to work, whenever you process a payment from the customer, you have to indicate which invoices have been paid. In other words, you have to match payments to invoices. Pastel, however, gives you the option to automatically match all payments from the oldest invoices down, so this is not necessarily too onerous.
With this method, Pastel Accounting Partner and Xpress does an approximation of which balances belong in which terms periods. It does this by reading the invoice and payment transactions for the terms periods, accumulating all invoice values in their terms periods, and then applying all payment values from the oldest terms period down. Whatever is left is the ageing.
This method requires no matching of payments to invoices at all.
Which Method Should You Use?
Firstly, if you need day based terms, you must use open item processing, since Pastel has to match payments to invoices in order to calculate what is due and overdue on a daily basis.
Balance forward is simpler to use, provided you do not need any more detailed matching information. You may need this matching information for uses other than payment terms.
For example, if there is a misunderstanding with a customer as to which invoices are unpaid, you can use open item processing to keep the queried invoices as unpaid until the matter is resolved. These invoices will appear on the customer's statement until they are matched with a payment or a credit note.