What Is Short Paying an Invoice and How to Handle It

Understanding Short Payments

An invoice is a formal request for payment, detailing goods or services, their cost, and payment terms. It ensures clarity for both the payee and the payer.

A short payment occurs when less than the total due is paid. Unlike a complete non-payment or overpayment, a portion of the debt is settled, but a balance remains. For example, if an invoice is for $1,000, and only $950 is remitted, it’s short-paid by $50. Managing these discrepancies is important for financial health and accurate records.

Common Causes of Short Payments

Short payments arise from various scenarios, from simple oversights to complex disputes. Understanding these causes helps businesses prevent and resolve discrepancies.

One frequent cause involves discounts taken by the payer. A buyer might apply an early payment discount even if terms have expired or were not applicable. Similarly, trade promotions or other marketing discounts not explicitly listed on the original invoice can lead to a deduction.

Returns or allowances result in short payments. If goods are returned, or a credit is due for damaged items, and these adjustments are not properly accounted for, the payer might deduct the amount. Service disputes are another reason, where disagreement over quality or completion leads the payer to remit only a partial amount.

Billing errors on the original invoice, such as incorrect quantities, pricing mistakes, or calculation errors, can cause a payer to adjust the amount. Simple mathematical errors by the payer can also lead to an underpayment. Occasionally, a payer might believe they are receiving a duplicate invoice and only pay one.

Shipping discrepancies, including issues with delivery, missing items, or incorrect freight charges, can prompt a payer to reduce the amount. Unapplied customer credit memos can also lead to a short payment, where the payer uses an existing credit balance to offset part of the invoice. These situations highlight diverse reasons behind a short payment, requiring investigation to determine the exact cause.

Managing Short Payments from the Payee Perspective

Upon receiving payment, the payee must reconcile the amount against the original invoice to identify discrepancies. Comparing the payment received with the total billed spots shortfalls immediately, allowing for quicker resolution and minimizing cash flow impacts.

Once a short payment is identified, investigate the reason. Review internal records for credit memos, return authorizations, or pre-agreed discount terms. Check for billing errors on the original invoice.

Clear, professional communication with the payer is important. Contact the payer to understand the discrepancy, providing invoice details and amount received. Document all communications.

Resolution options vary based on investigation findings. If valid (e.g., authorized return or discount), issue a credit memo or adjust the invoice. If unintentional or unjustified, request the remaining balance, setting a reasonable deadline.

From an accounting standpoint, record partial payment against the invoice, leaving the balance as an open receivable. Accounting software often marks invoices “partially paid” until resolved. If uncollectible, the balance may be written off as a bad debt expense, impacting the accounts receivable aging report.

Managing Short Payments from the Payer Perspective

When short paying an invoice, proactive communication with the vendor is important. Explain the reason for the reduced amount (e.g., dispute, product return, or existing credit). This upfront notification prevents misunderstandings and maintains a positive business relationship.

Maintain thorough documentation to justify any short payment. This includes return receipts, dispute correspondence, and credit memos. These documents provide clear evidence for the reduction and can be referenced if the payee inquires.

When making a partial payment, clearly indicate the invoice and specific amount remitted. Remittance advices should detail fund allocation and explain deductions. This clarity assists the payee in accurately applying the payment and understanding the short amount.

If the payee inquires about the short payment, respond promptly and professionally. Reiterate the reason and provide supporting documentation. Maintaining open communication helps resolve outstanding issues efficiently.

In accounting records, record partial payment against the accounts payable liability. If a dispute exists, the remaining disputed amount may be held as a contingent liability or noted until resolved. Internal notes regarding the short payment are important for audit and consistency.