Cash application is matching each customer payment to the invoices it settles, so the receivables ledger shows exactly what every customer still owes. It covers full payments, part payments, one payment for several invoices and money that cannot yet be identified.
What is cash application?
When money arrives in the bank, the bank reconciliation proves it reached the right account. Cash application answers the next question: which invoices did it pay? Until a receipt is applied, the customer's invoices still look open, and the aging report overstates what is overdue.
It is a task in accounts receivable, separate from the bank reconciliation. A receipt can be in the right bank account and still sit against the wrong customer or the wrong invoice.
How does cash application work?
- Capture the receiptTake each incoming payment from the bank statement with its date, amount, payer name and reference.
- Identify the customerUse the payer name, bank account or reference. If nobody can tell who paid, hold the money in a suspense account with an owner, never in revenue.
- Find the invoicesAn invoice number in the reference is the strongest match. Without one, look for an open invoice of exactly that amount for that customer.
- Apply in full or in partOne receipt can settle several invoices, part of one, or sit on the customer's account until the customer says what it is for.
- Deal with differencesA short payment may be a bank charge, a deduction or a dispute. Record the reason and follow it up, and write nothing off without approval.
- Post and reviewUpdate the receivables ledger, then check that the customer balance matches what the customer believes it owes.
What does cash application look like in practice?
Why does cash application matter?
Collections teams chase from the aging. If receipts are not applied, they chase customers who have already paid, which wastes time and harms the relationship. Dunning reminders go out wrong for the same reason.
The credit loss allowance depends on it too. IFRS 9 names a provision matrix with rates by days past due as a practical way to estimate expected credit losses on trade receivables (paragraph B5.5.35), so an unapplied receipt can leave a paid invoice in an old bucket and inflate the allowance.
Apply receipts daily or weekly rather than at month end, while references are fresh and customers remember what they paid.
Questions people ask
What is unapplied cash?
Money received from a customer that has not yet been matched to an invoice. Hold it on the customer's account or in suspense and clear it quickly; a growing unapplied balance makes the receivables ledger unreliable.
How is cash application different from bank reconciliation?
A bank reconciliation agrees the bank account with the ledger. Cash application matches each customer receipt to the invoices it pays, so the receivables ledger is right. You need both.
Can cash application be automated?
Much of it can when payments carry invoice references. Exact matches can be suggested automatically, but part payments, deductions and unidentified money still need a person to decide.
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