When selling to other businesses, it is common to extend them credit terms. This allows your customers to place sales, receive the items, and pay for them later. However, there is a risk involved with extending credit terms, which is why each customer will also have their own credit limit, specifying the maximum value of orders they can place before having to pay their balance.
Credit limit and terms
Both the credit limit and the terms are set on an individual customer record, in the "Financial" tab, under the "Payment information" section:
The credit limit is a numeric value that represents the maximum account balance a customer is allowed to have.
The credit terms detail how long they have to pay an individual invoice. It is comprised of a number in days and a choice between:
- Net: this number of days from the invoice date
- Net EOM: this number of days from the end of the month the invoice was issued
For example, say a customer had an invoice issued on March 1st.
If their terms were 30 days Net, they would have to pay the invoice on March 31st.
If their terms were 30 days Net EOM, they would have to pay the invoice on April 30th.
Broadly, the customer's account balance is the sum of all unpaid invoices, less the sum of open credits and on account payments.
More specifically, every time:
- A sales invoice is posted
- A sales credit is posted
- A payment or refund is posted
... the related accounting entry will post to the accounts receivable (or debtors control) account, which is always code 1100.
The balance of all entries on the 1100 account related to a customer will result in the customer's account balance. A debit balance is a positive account balance, while a credit balance is a negative one.
A positive account balance indicates the customer owes you money, while a negative one indicates they have a credit or payment on account, or may be due a refund.
|Effect on 1100 code|
|Receipt of money||X|
|Refund of money||X|
Credit limit controls
Enforced account balance credit limits will prevent new orders from being created once the account balance has reached the credit limit.
If the user has permission to do so, they can increase the contact credit limit to authorize further orders.
To enable enforced restrictions, go to Settings > Company > Accounting: options and set "Lock overdue accounts" to "Yes":
Warning: Until the financial account balance has reached the credit limit, new orders can be created. At the point the credit limit is reached, the restriction will activate.
An order started prior to the account balance reaching the credit limit but which will itself take the balance over the credit limit will not be prevented.
For example, if their credit limit is $1000 and their current account balance is $900, you will still be able to raise a sale for any value.