What Is an EDI 820 Payment Order/Remittance Advice?
Understand the EDI 820 transaction, a key electronic standard for efficient and accurate payment and remittance reconciliation.
Electronic Data Interchange (EDI) facilitates the computer-to-computer exchange of business documents in a standardized electronic format. This system allows businesses to automate data transfer, reducing errors, and expediting transactions. The EDI 820 transaction set specifically addresses the electronic transmission of payment and remittance information. It provides a structured method for communicating payment details, ensuring clarity and efficiency in financial reconciliation.
Electronic Data Interchange Fundamentals
Electronic Data Interchange (EDI) represents a shift from paper-based exchanges to automated digital communication between businesses. Its purpose is to enable seamless business-to-business (B2B) interactions by standardizing the format of common commercial documents, such as purchase orders, invoices, and shipping notices. This standardization ensures that different computer systems can process and understand exchanged information without human intervention, enhancing speed, cost-efficiency, and accuracy.
In the United States, the Accredited Standards Committee X12 (ASC X12) develops and maintains these EDI standards. These standards define the structure and content of electronic messages, allowing diverse businesses to exchange data consistently and reliably. Adherence to these established formats reduces discrepancies, streamlines operations, and fosters stronger business relationships.
The EDI 820 Transaction Set
The EDI 820 transaction set is formally known as the Payment Order/Remittance Advice. Its function is to convey detailed payment information from a payer to a payee, often in conjunction with an electronic funds transfer (EFT). This electronic document informs the seller that a payment has been made and provides specific details about how that payment should be applied.
The EDI 820 streamlines the reconciliation of payments by outlining which invoices are being settled. It also advises the seller of any adjustments to the payment amount. Parties involved in an EDI 820 exchange include the payer (buyer) and the payee (seller); financial institutions may also be involved. This transaction set is sent in response to an invoice, such as an EDI 810 Invoice, or a purchase order, like an EDI 850 Purchase Order.
Components of an EDI 820
An EDI 820 transaction set contains data elements and segments structured to provide payment and remittance details. This information allows the receiving party to reconcile payments against outstanding invoices. Components include identification details for both the payer and the payee, such as company names, addresses, and unique identification numbers.
The document specifies the payment amount, which may cover multiple invoices or transactions, and the payment method, such as electronic funds transfer or check. It includes remittance details, which provide a breakdown of how the payment applies to specific invoices, including invoice numbers, amounts, and any applicable discounts or adjustments. Banking information for both parties and payment tracking information are also part of the EDI 820, ensuring financial traceability and aiding cash flow management.
The EDI 820 Process Flow
The process flow for an EDI 820 exchange begins when a payer initiates payment for outstanding invoices. The payer’s financial or Enterprise Resource Planning (ERP) system generates the EDI 820 document, which encapsulates all necessary payment and remittance information. This document is then transmitted to the payee through a Value Added Network (VAN) or a direct EDI connection.
Upon reception, the payee’s EDI system processes the incoming EDI 820. This involves translating the standardized EDI format into a format compatible with their internal accounting or accounts receivable system. The system automatically matches the payment details provided in the EDI 820 with open invoices, streamlining the cash application and reconciliation process. This automation reduces manual effort, minimizes errors, and accelerates payment crediting.