In this article, we have tackled a detailed indepth explanation of how the system works internally when an Invoice or Debit Note is settled against a Receipt/Credit Note. Lets first understand the functionality provided in the Control Panel.
There are many places where you can choose to settle the Invoices/Debit notes of your Customers/Sub-Resellers:
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From the List View or Details View of an Invoice or Debit Note
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From the Details View of an Order for all Invoices associated with that Order
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After performing an Add Funds transaction, the system gives you a list of Pending Invoices and Debit Notes
An Invoice and Debit note are quite different transactions. An Invoice is always related to an underlying Order, and may actually have some action of the Order dependant on the Invoice. For instance, an Invoice for Renewal of an Order has the action of renewal dependant on the Invoice. A Debit Note on the other hand is not related directly to any Order. The system itself does not recognise any link between a Debit Note and a specific Order. However, with respect to accounting effect, both of them reduce the balance of your Customer/Sub-Reseller when they are paid for. With respect to the process of settling them, they function exactly the same way. Let us examine this process of balancing of an Invoice or Debit Note.
It is important to understand that by simply having an Invoice or Debit Note, it does not reduce the balance or available funds of your Sub-Resellers or Customers. You or you Sub-Reseller/Customer have to actually balance that Invoice or Debit Note (settle it) against some Receipt(s)/Credit Note(s) in order for it to reduce the available balance of your Customers/Sub-Resellers.
Balancing of an Invoice/Debit Note
When you or your Customer/Sub-Reseller chooses to pay for an Invoice or Debit Note, you/he/she are given the option use the existing Debit Account balance of the Customer or Sub/Reseller to pay for the Transaction. There is also an option to Add Funds to the Debit Account, or pay online depending on what options you have enabled for your Customers/Sub-Resellers. In effect, however, an Invoice or Debit note gets paid through some Receipt or Credit Note. The Receipt/Credit Note could have already been added from before, or added during the Invoice/Debit Note Payment process.
Both an Invoice and a Debit Note consist of the following fields:
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Invoice/Debit Note Amount: This is the amount of the Invoice or Debit Note.
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Pending Amount: This is the amount of payment pending on this Invoice or Debit Note.
The above amounts will be stored in dual currency, in case your Selling Currency is different from your Accounting Currency.
Lets journey through the payment process of an Invoice to understand what actually goes on during the Payment process. Upon confirming the balancing process, the System will attempt to balance this Invoice against existing Receipt(s)/Credit Note(s) or a New Receipt, depending on where the payment is attempted from.
Lets take a dummy Invoice for a Customer A with the following figures:
Invoice ID: 1
Invoice Amount: USD 100 (INR 5000)
Pending Amount: USD 100 (INR 5000)
Conversion Rate: 50
Note the following points about the above Invoice:
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As you can see, the above Invoice is fully unpaid (since the Pending Amount is equal to the Invoice Amount).
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Additionally the Selling Currency in this example is USD and the Accounting Currency is INR.
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The conversion rate between both is taken as 50. This conversion rate is the conversion rate at which the Invoice was entered or created manually or by the System.
Lets now Assume that the Customer A has the following Receipts in his account:
Receipt ID: 1
Receipt Amount: USD 50 (INR 2450)
Pending Amount: USD 0 (INR 0)
Conversion Rate: 49
Receipt ID: 2
Receipt Amount: USD 75 (INR 3675)
Pending Amount: USD 50 (INR 2450)
Conversion Rate: 49
Receipt ID: 3
Receipt Amount: USD 75 (INR 3600)
Pending Amount: USD 75 (INR 3600)
Conversion Rate: 48
As we can see above, there are 3 Receipts, each with a different pending amount. The important aspects to note are as follows:
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Receipt ID 1 has no pending amount remaining. This means that this Receipt of USD 50 has been fully utilised against other previous transactions. Receipt ID 2 and 3 have some pending amount which can be utilised to balance this Invoice.
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The conversion rate of the Receipts is different from the conversion Rate of the Invoice. This is obvious considering that the Receipts would have been fed in on a different day from the Invoice.
Now this is what the system will do. It will gather all Receipts which have some pending amount left in them. The system will then use these Receipts one after another to balance the Invoice until either the Invoice or the Receipts are completely balanced. The important aspect in this payment process is the forex difference calculation. Since the Invoice and Receipt are both fed in at different Conversion rates, it is obvious that there will be a Forex gain or loss with respect to this payment. The system automatically calculates this Forex Gain/Loss and stores it against the Invoice for you to account it appropriately. Here is how this works -
In the above case the system would first inspect Receipt ID 2. This Receipt has a pending amount of USD 50. Here we bring up an important point. When the system is balancing Invoices or Debit notes, it is actually balancing the Selling Currency Amount. What this basically means is if your Invoice is for USD 100, the system will attempt to balance Receipts worth USD 100 against this Invoice. By now you would have got a clue as to how the Forex diff would come into picture. In the process of balancing USD 100 from receipts, the INR amount used up from the Receipts would not be the same as the INR amount of the Invoice, since they are both fed in at different conversion rates. This leads to the Forex Diff. Lets see how this alculation works.
In the case above the System will use USD 50 from Receipt ID 2 and USD 50 from Receipt ID 3 in order to balance the USD 100 Invoice. In this process let us compute the INR amount of each Receipt that is used up.
Receipt ID: 2
USD Amount utilised: USD 50
INR Amount utilised: USD 50 x 49 (Conversion rate) => INR 2450
Receipt ID: 3
USD Amount utilised: USD 50
INR Amount utilised: USD 50 x 48 (Conversion rate) => INR 2400
Total USD Amount Utilised: USD 100
Total INR Amount Utilised: INR 4850
The above calculation shows the amounts utilised in both currencies to fulfill an Invoice of USD 100. The Invoice amount in INR as we know was INR 5000. Against that we have Receipts of INR 4850. The difference between these is the Forex Loss of (INR 150). Below we have the final status after the payment is completed:
Invoice ID: 1
Invoice Amount: USD 100 (INR 5000)
Pending Amout: USD 0 (INR 0)
Forex Loss: INR 150
Receipt ID: 2
Receipt Amount: USD 75 (INR 3675)
Pending Amount: USD 0 (INR 0)
Conversion Rate: 49
Receipt ID: 3
Receipt Amount: USD 75 (INR 3600)
Pending Amount: USD 25 (INR 1200)
Conversion Rate: 48
At the end of the transaction, the Invoice is fully balanced, Receipt ID 2 is fully utilised, Receipt ID 3 is partly utilised and there is a Forex Loss of INR 150.
There are a few important points to note in the above transaction:
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The transaction would work in exactly the same fashion if you had a Debit Note instead of an Invoice, or a Credit note instead of the Receipt.
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The Invoice in this case was fully balanced, while the last Receipt (Receipt ID 3) was partly utilised. The reverse condition could also take place, wherein the Receipts were not sufficient to cover the Invoice Pending Amount, and therefore the Invoice would remain partly paid, and the Receipts would be fully utilised.