Paid Invoice, Later Credit Memo, and a Mixed Expense Report
A US business unit has an invoice from Helios Industrial for $18,000, terms Net 30, which was paid in full on 2 May by electronic transfer. On 20 May, the supplier issues a $2,400 credit memo for five returned pumps. The supplier asks for a cash refund. Separately, an employee submits an expense report for $1,850. It includes a $300 personal hotel upgrade, a $450 charge on the corporate card that the card provider has already billed to the company, and $1,100 of legitimate airfare and meals. The employee selected reimburse employee for the entire report. The payables team also sees that the original invoice was matched to a PO and that the credit memo is not linked to the PO. The period closes in four days.
1. How should the credit memo be recorded and settled given that the invoice is already paid? Include the accounting effects and the PO-link issue.
Read the worked answer
The credit memo should be entered and approved as a credit memo, not as a negative invoice outside the normal process. Because the original invoice is fully paid, applying the credit memo to that invoice will not create a negative payment; it leaves an unapplied credit or credit balance on the supplier account.
The practical settlement options are:
- Apply to other open Helios invoices. This is the cleanest option if other approved invoices exist. The credit reduces the liability selected for payment.
- Carry the credit and offset future invoices. This preserves cash but requires monitoring so the credit is not forgotten.
- Issue a refund. Create a refund payment through Payables, with appropriate approval, rather than manually paying the supplier outside the system.
Accounting: the credit memo debits the liability or expense and credits the liability reduction; a refund debits the supplier liability and credits cash. If the credit memo is not linked to the PO, the credit may hit expense rather than relieve the received-not-invoiced accrual. Because the returned pumps relate to a PO receipt, match the credit memo to the PO or receipt where possible so the accrual and expense are reversed in the right place. If the credit memo cannot be matched, document the accounting treatment and review the accrual at period end. Do not reverse the original payment.
2. How should the $1,850 expense report be paid? Identify the treatment of each line.
Read the worked answer
The report should pay $1,100, not $1,850.
- $300 personal hotel upgrade: non-reimbursable under normal policy. It should be flagged as personal, excluded from reimbursement, and may require employee repayment if the company was charged directly.
- $450 corporate card charge: this is a company liability, not an out-of-pocket expense. It should use a corporate card expense type and a company-paid or corporate card payment method so it does not generate reimbursement to the employee. Because the card provider has already billed the company, reimbursing the employee would duplicate the cost.
- $1,100 airfare and meals: reimbursable if within policy and supported by receipts.
The report payment method should be corrected before payment. If the report was already approved, adjust or reject it rather than paying and recovering later. The key control is an audit rule that flags personal expense types and corporate card transactions submitted as employee-reimbursable.
3. What controls should be added for credit memos and expense reports to prevent similar issues?
Read the worked answer
Use separate controls for the two transaction types.
Credit memos:
- Require credit memo approval independent of the person who entered the original invoice.
- Match credits for returned goods to the PO or receipt when possible, so accruals reverse correctly.
- Age unapplied credit memos and review them before period close.
- Require treasury or controller approval for cash refunds, and process refunds through Payables so they are recorded and reconciled.
Expense reports:
- Use audit rules to flag personal expenses and corporate card charges submitted as reimbursable.
- Reconcile the corporate card feed to expense reports so already-billed card transactions are not paid twice.
- Require receipts above policy thresholds and manager approval.
- Perform random audits and track repeat offenders.
Together these controls prevent duplicate payment, ensure the credit is not lost, and keep the supplier balance and expense accounting accurate at close.