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How to Deal With Overpaid Invoices in Hong Kong

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

overpaid invoice

Take the example of when an invoice is received from a corporation amounting to HK$4,950 for a recent inventory purchase. If the customer has made an error while making the payment and has accidentally paid HK$5,490, then there is a mistake of paying an excess amount of HK$540 (HK$5,490 - HK$4,950). This is known as an overpaid invoice.

What are the Reasons for an Overpayment on the Invoice?

Following are some reasons for an overpayment:

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:

  1. 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.

  2. 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.

  3. 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:

    1. 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.

    2. 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.

  4. 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:

Email Template Letter for Overpayment of the Invoice (Customer’s Perspective)

Subject: Overpaid notification for the invoice # {XXX}

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:

  1. 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.

  2. 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.

  3. 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.

  4. 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)

Subject: Overpaid notification for the invoice # {XXX}

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.  
Additionally, we are open to understanding if you have any other solution to this matter. Please note that our goal is your satisfaction and solution of this matter on a priority basis. Further, if you have questions or queries, please feel free to reach us at (your email/phone number).

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:

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:


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