A customer account should show what the customer owes you. When it shows a credit balance, the position is reversed: you owe the customer. The same is true in mirror image on the purchase ledger, where a supplier account in debit means the supplier owes you. Small balances like these pile up quietly, distort aged reports and, at year end, sit on the wrong side of the balance sheet.
How a customer ends up in credit
| Cause | How it shows on the account | Usual resolution |
|---|---|---|
| Customer paid the same invoice twice | Two receipts against one invoice, the second unallocated | Refund, or offset with written agreement |
| Customer overpaid (rounded up, paid gross when a discount applied) | Receipt larger than the invoice | Refund or keep on account if they buy regularly |
| Credit note issued but never matched | Credit note open, invoice still open or already paid | Allocate if the invoice is unpaid; refund if it was paid |
| Receipt posted to the wrong customer | One account in credit, another overdue by the same amount | Reallocate between the two accounts |
| Deposit taken, final invoice never raised | Receipt with no invoice behind it | Raise the invoice |
| Order cancelled after payment | Receipt, plus a credit note or no invoice | Refund |
The last two are not really overpayments at all; they are bookkeeping gaps, and the fix is to complete the paperwork rather than to send money back.
Investigating the balances
Run the aged debtors report and filter or sort for negative balances. Work from the oldest down, because the oldest are hardest to explain and the most likely to need a write-back decision.
For each account:
- Open the full transaction history, not just the open items. Look for the invoice the receipt was meant for.
- Check whether the same customer exists twice in the ledger, or trades through a parent company with a separate account; the overdue invoice may be sitting there.
- Read the remittance advice if there was one, and any emails around the payment date.
- Look for an unallocated credit note on the account. Many apparent overpayments are simply credit notes and invoices that were never matched against each other.
Anything you can explain from your own records, correct with a reallocation. Only contact the customer once you know what the balance actually is.
Refund, offset or hold
Refund when the customer is not likely to buy again, when the amount matters to them, or when they ask. Pay back to the bank account the money came from, and confirm any new bank details by phone using a number you already hold, not one from the email asking for the refund. The bookkeeping for the refund itself is covered in customer refunds in bookkeeping.
Offset against the next invoice when the customer trades with you regularly and agrees in writing. Note the agreement on the account so whoever allocates the next receipt knows to apply the credit.
Hold on account only for a short, defined period. An indefinite credit sitting against a regular customer is easy to forget and easy to allocate twice.
Writing back credit balances nobody claims
Some customers cannot be reached or never reply. Decide in a written policy how long you will keep trying and how many contact attempts count as reasonable, then release what remains.
The write-back journal moves the balance from the customer account to income:
| Account | Debit | Credit |
|---|---|---|
| Trade debtors (customer account) | £48.00 | |
| Other income: unclaimed credit balances | £48.00 |
Points to keep in mind:
- The money is still legally the customer’s. The UK has no general rule requiring an ordinary trading business to hand unclaimed customer money to the state, but the customer can normally still claim it for six years under the Limitation Act 1980 (five years in Scotland). If they come back, refund it and reverse the income.
- It is taxable. The released amount is business income for corporation tax or income tax.
- Check the VAT. A plain overpayment is not payment for any supply, so releasing it does not normally create output VAT. If the balance came from a credit note you issued, the credit note already reduced your output VAT, so talk to your accountant before releasing it.
- Keep the evidence of your attempts to contact the customer with the journal.
Amounts below a few pounds are better handled under a small balance write-off threshold than chased one by one.
Supplier accounts in debit
On the purchase ledger the same mistakes happen in reverse, and here the money is yours. Common causes:
- you paid an invoice twice, often once by card and once in a payment run (see duplicate invoices and duplicate payments)
- a supplier credit note was posted but not matched against an invoice that was then paid in full
- you paid a deposit or pro forma and the final invoice was never entered
- a payment was allocated to the wrong supplier
Start by comparing the account to the supplier’s own statement; a supplier statement reconciliation usually shows straight away whether the supplier agrees they owe you. Then ask for either a refund or a credit against the next invoice, in writing, quoting the transaction dates.
If the supplier has ceased trading or refuses, the balance is an asset you will not recover. Write it off to an expense such as bad debts or the original cost account, after considering whether a claim in the supplier’s insolvency is worthwhile. If a credit note was involved, your input VAT was already reduced when you posted it, so no further VAT adjustment is needed on the write-off.
Year-end presentation
At the balance sheet date, customer accounts in credit are liabilities and supplier accounts in debit are assets. Rather than netting them inside trade debtors and trade creditors, reclassify material amounts: customer credits to other creditors, supplier debits to other debtors or prepayments. Reverse the reclassification on the first day of the new year so the ledgers stay intact.