When someone pays more than what was on the bill, (either deliberately or accidentally), it is known as ‘over-payment’. Usually, companies who get an over-pay either refund the extra amount or adjust it in future orders. It totally depends on the company’s policy.

But the main question here is, how overpayment will get treated in the books of accounts?

We will guide you to different aspects of overpayment and how Xero will help you manage your overpays.

Reconciliation Of Overpayment

• Xero helps you detect the overpay invoice and adjust it into your accounts. 
• Account adjustment of overpaying
• When the accountant enters the amount on an invoice, Xero automatically detects overpay received.
• It prepares a separate overpayment account and transaction which will be visible in your bank account.

How to process overpayment in Xero?

1) In the accounting menu, select the bank account you want to manage.

2) Then, click on ‘reconcile items’.

3) Cross-check every transaction imported from the bank on the left side of the ‘reconcile tab’.

Will Overpayment Liable to Tax?

Well, this is very crucial and frequently asked question. Whether the overpaid amount be charged under tax or not?

Well, the answer is simply ‘YES’. However, if the refund has been generated before the end of the financial year, then that means the refunded amount has been cleared off and is not liable under tax payment.

But the amount to be adjusted and yet to be refunded will be shown under the profit and loss account, will be liable to be charged under tax rules. According to HMRC, the business does not separate overpaid receipts from other regular receipts, thus, making it a trading profit.

Settling Overpayments

Overpayment received from any customer must be treated precisely, otherwise, it would bring unwanted trouble in accounting and tax calculation. You may choose to refund it or adjust in future invoices. Whatever the choice would be, Xero will help you manage your overpayment without any mess.

1) Refunding the amount: Refunding the overpaid amount is easier as compared to adjusting in future invoices as it is on way step or clearing off. Follow the steps mentioned below to refund overpayment through Xero:

"Select invoices in the ‘business’ menu.

"Select the ‘awaiting payment’ tab.

"Select the overpaid amount you want to refund.

"Fill the payment fields and complete the cash refund.

"Click refund.

2) Offset against other payment: Adjusting an overpaid amount can be a bit tricky as you have to who’s invoices and how much amount can be settled through excess. Xero helps you with a prepared analog of all the details regarding every overpaid and refunded invoices. Follow the steps below to adjust overpaid amounts:

"Select ‘invoices’ in the ‘business’ menu.

"Click on the ‘awaiting payment’ tab.

"Select on the ‘overpayment options’.

"Click on allocate credit.

"All the unpaid invoices from this customer will be shown on your screen. Enter the amount you wish to adjust to settle invoices.

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