Unapplied Credits: Why They Happen & How to Fix Them?
Côme Chevallier
Apr 14, 2025
Managing unapplied credits might not be the most exciting part of running a business, but it’s definitely one of the most important.
If left unchecked, these lingering credits can throw off financial reports, make cash flow harder to predict, and even lead to confusion for both businesses and customers.
Keep reading to find out:
What Does ‘Unapplied Credit’ Mean?
Think of an unapplied credit as money that’s in your bank account but hasn’t been assigned to a specific invoice yet. Also referred to as ‘unapplied cash’, it’s essentially a payment that a business has received but hasn’t matched to a bill.
This can happen for several reasons—maybe a customer overpaid by mistake, sent a payment in advance, received a credit memo for a return or discount, or an accounting error left the payment unassigned.
While unapplied credits might not seem like a big deal at first, they can throw off financial reports and make your business cash flow harder to track. That’s why you need a solid process to manage and resolve these credits efficiently, ensuring your books stay accurate and cash flow remains predictable.
When Do Unapplied Credits Happen?
Unapplied credits can arise in a variety of situations, including:
Customer Overpayments: Sometimes, a customer accidentally pays more than they owe. Until the extra amount is applied to a future invoice or refunded, it sits as an unapplied credit.
Prepayments and Deposits: If a customer pays in advance for a product or service before receiving an invoice, that payment remains unapplied until the invoice is created and linked.
Credit Memos: When businesses issue credits due to returns, discounts, or billing adjustments, those amounts don’t always get applied to an invoice right away, leaving them in limbo.
Incomplete Payment Information: If a customer submits a payment without key details (like an invoice number or reference), it may not get assigned properly, keeping it stuck in unapplied status. Upflow users can easily track all unapplied payments in their payments list view.
Accounting and Data Entry Mistakes: Simple errors—like misclassifying transactions or assigning payments incorrectly—can leave credits unapplied until someone manually fixes them.
Applied Payments and Unapplied Credits: What’s the Difference?
Not all payments are created equal—at least when it comes to accounting.
Understanding the difference between applied payments and unapplied credits is key to keeping financial records accurate and cash flow steady.
Applied Payments
An applied payment is a payment that has been correctly matched to an invoice. Once applied, it reduces the customer’s outstanding balance and ensures that revenue is properly recorded. Applied payments help businesses maintain a clear picture of their cash flow since they reflect funds that have been received and accounted for.
Unapplied Credits
Unapplied credits, on the other hand, are payments that haven’t been assigned to an invoice yet. This could be due to a customer overpaying, paying in advance, or an error in payment processing. When these credits sit unallocated, they can cause discrepancies in financial reports, create confusion for both businesses and customers, and require extra administrative work to sort out.
How to Fix Unapplied Credits
Unapplied credits don’t have to be a headache—if you have the right approach. Follow these steps to get them sorted and keep your accounts in order:
Identify and Review Unapplied Credits: Start by reviewing your financial records to pinpoint any unapplied credits. Make sure you understand where each one came from. In Upflow, you can easily check unapplied amounts for each customer in the customer list view.
Match Credits to Open Invoices: Whenever possible, apply unapplied credits to outstanding invoices to clear account discrepancies. For example, in Upflow, credit notes can be directly matched to invoices in the credit notes list view:
Communicate with Customers: If an overpayment or prepayment is the cause, reach out to the customer to see if they’d prefer to apply the credit to a future invoice or receive a refund.
Process Refunds When Necessary: If there are no open invoices and the customer requests a refund, process it according to your company’s policy.
Fix Data Entry Errors: If the unapplied credit was caused by a misclassified transaction or an incorrect entry, update your records to reflect the correct allocations.
Document and Adjust Accounting Records: Keep a detailed record of all adjustments to maintain transparency and ensure your financial reports stay accurate.
Automate Credit Application: Use accounting software or cash application automation tools to streamline the process of matching payments with invoices, reducing manual errors and preventing future unapplied credits
Tips to Prevent Unapplied Credits
The best way to deal with unapplied credits? Stop them from happening in the first place.
A few simple changes to your processes can go a long way in keeping payments properly allocated and your books in order. Here are some key strategies:
Make Payment Instructions Crystal Clear: Ensure customers know exactly how to reference their payments by including invoice numbers and any other necessary details. Clear instructions reduce the chances of payments going unapplied.
Automate Cash Application: AI-powered tools can match payments to invoices automatically, cutting down on manual work and preventing errors that lead to unapplied credits.
Reconcile Accounts Regularly: Periodic reviews of accounts receivable help catch and fix unapplied credits before they pile up and become a bigger issue.
Improve Internal Payment Processes: Standardizing how payments are recorded and applied ensures consistency and reduces the risk of misallocated funds.
Train Your Finance Team: Equip your team with best practices for handling unapplied credits so they can identify, resolve, and prevent them more effectively.
How Upflow Helps You Tackle Unapplied Credits
Upflow makes managing unapplied amounts easier, ensuring they’re properly accounted for and aligned with outstanding balances.
Clear Visibility and Tracking
Tracking unapplied amounts can be a hassle in many financial systems, often requiring manual workarounds and time-consuming reports.
Upflow simplifies this process with intuitive dashboards that provide real-time visibility into unapplied credits.
Whether you’re in the customer list view, credit notes, or payments list, Upflow clearly highlights these amounts—making it easier to track, allocate, and resolve them efficiently.
By eliminating the complexity found in traditional finance systems, Upflow saves finance teams valuable time and effort.
Accurate Outstanding Amount Calculation
With Upflow, unapplied credits are factored into outstanding balances the right way. This prevents discrepancies across dashboards and ensures key financial metrics—like Days Sales Outstanding (DSO) and collection effectiveness—stay accurate.
Aging Balance and Unapplied Amounts
Many financial systems don’t provide a clear view of unapplied amounts, making it difficult to assess their impact over time.
Upflow offers a unique aging balance view that categorizes unapplied credits using industry-standard aging methods. This visual breakdown (which is rarely found in other finance tools) helps finance teams better understand how unapplied credits affect their financials, leading to more accurate forecasting and smarter decision-making.
Want to get access to analytics like this for your business, for free? Sign up to our free discover plan. With just three simple clicks, you can integrate your ERP or billing system, gain instant visibility into key AR metrics, and access valuable benchmarking insights tailored to your industry and business model.
Better Customer Experience
A smooth payment experience is a crucial part of maintaining strong customer relationships. When payments aren’t properly applied, customers can be left confused, frustrated, or even hesitant to continue doing business.
Unapplied credits can lead to disputes, delayed payments, and unnecessary back-and-forth between finance teams and customers—all of which slow down cash flow and hurt the overall customer experience.
With Upflow’s Financial Relationship Management (FRM) approach, businesses can take a more customer-centric view of their Accounts Receivable process.
By proactively identifying and resolving unapplied amounts, finance teams can provide customers with clear, accurate invoicing and a seamless payment experience. This not only reduces disputes but also fosters trust and strengthens long-term relationships.
When customers have full visibility into their payments and balances, they’re more likely to pay on time and engage positively with your business.
More Efficient Workflows
Upflow’s powerful filtering options and saved views help finance teams quickly identify and apply outstanding credits. This reduces administrative overhead, making it easier and faster to manage Accounts Receivable.
With Upflow, businesses can proactively manage unapplied credits, ensuring accurate financial reporting, better cash flow management, and a smoother customer experience.
With Upflow’s Financial Relationship Management (FRM) approach, you gain full visibility into your Accounts Receivable, while being empowered to take a customer-first approach to AR. So what? You’ll simplify how you track, allocate, and resolve unapplied credits before they become a problem for your customer relationships.
Want to see how Upflow can help your finance team stay ahead of unapplied credits and improve your cash flow? Book a demo today and experience firsthand how Upflow simplifies Accounts Receivable management while enhancing your customer relationships.
FAQs
Q: What does it mean when it says unapplied credit?
A: An unapplied credit refers to a payment a business has received but hasn’t yet matched to a specific invoice. This could happen due to overpayments, prepayments, credit memos, or processing errors. Until it’s applied to the correct invoice, it remains unallocated in your accounting system and can cause reporting inaccuracies and confusion.