Settlement is an accounting transaction that occurs on accounts payable, accounts receivables, and general ledger. This transaction is used mainly for settling vendor invoices against vendor payments or advanced payment, and customer invoices against customer collections or advanced collection. Settlement could occur on general ledger transactions as well.
It is necessary to classify posting profiles of the vendor and customer in the opening balance since it will affect the settlement process.
The settlement transaction affects vendor and customer balances, and it is reported in the vendor or customer statement report that identifies the following:
- The open (unsettled) invoice and payments
- The closed (settled) invoiced and payments
- Vendor balance
- The open (unsettled) invoice and collections
- The closed (settled) invoiced and collections
- Customer balance
A settlement transaction could occur during a payment or collection transaction if the accountant marks the invoice which will be paid or collected. On other hand, the settlement could be performed on the vendor or customer level, and these transactions could be unsettled.
The settlement transaction should take into consideration the currency since it could be performed in the company home currency by equivalent amount which calculated based on currency exchange rate, or it could be settled in the same currency of invoice by identifying the currency in payment process.
Customer settlement mechanism – Dynamics AX
Customer settlement in Microsoft Dynamics AX is a transaction used to settle customer advanced collections or collections against customer invoices, and this function done on a monthly basis.
Customer settlement has two different effects. The first one is on customer level – it closes the customer transaction. And the second one is on the financial entry, which is only an effect in the case that the posting profiles of the advanced collection and invoice are different.
Next I will illustrate the mechanism of customer advanced collection, invoices, and customer settlement financial entries (in Egyptian Pounds – EGP):
1) Customer advanced collection posting profile is Prepayments, and the financial entry will be:
- Dr. Banks 1200 EGP
- Cr. Customer deposits 1200 EGP
- Open transactions: 1200 EGP Advanced collection
2) Customer invoice posting profile is General , and the financial entry is:
- Dr. Receivables 1000 EGP
- Cr. Sales revenue 1000 EGP
- Open transactions: 1200 EGP Advanced collection, and 1000 EGP sales invoice
3) Customer settlement
- Dr. Customer deposits 1000 EGP
- Cr. Receivables 1000 EGP
- Open transactions: 200 EGP Advanced collection
- Closed transactions: 1000 EGP advanced collection, and 1000 EGP sales invoice
In the case that the posting profiles of advanced collection and invoicing are different, then there is a settlement financial entry that will be created.
Vendor settlement mechanism – MS Dynamics AX
Vendor settlement in Dynamics AX is a transaction that occurs to settle vendor advanced payments against vendor invoices, and this function is done on a monthly basis.
Vendor settlements have two different effects. The first one is at the vendor level: the vendor transaction closes. The second is the financial entry, which occurs only in one case if the posting profile of advanced payment and invoice are different.
Here I will illustrate the mechanism of vendor advanced payment, invoices, and vendor settlement financial entries.
1) Vendor advanced payment posting profile is advanced,and the financial entry will be:
- Dr. Advances to vendor 1200 EGP
- Cr. Bank 1200 EGP
- Open transactions: 1200 EGP Advanced payment
2) Vendor invoice posting profile is General, and the financial entry is:
- Dr. Expense 1000 EGP
- Cr. Payables 1000 EGP
- Open transactions: 1200 EGP Advanced payment, and 1000 EGP vendor invoice
3) Vendor settlement
- Dr. Payables 1000 EGP
- Cr. Advances to vendor 1000 EGP
- Open transactions: 200 EGP Advanced Payment
- Closed transactions: 1000 EGP advanced payment, and 1000 EGP vendor invoice
In the case that the posting profiles of advanced payment and invoicing are different, a settlement financial entry will be created.
User Group: Dynamics Arabia
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