What is remittance advice?

Definition

Remittance advice is a short note a customer sends with a payment to name the bills the money should cover. It is not an account on the books, only paperwork that sits next to the cash.

The note explains how the seller should treat money that has already moved, or is about to move, into the bank. There is no remittance-advice line on the Balance Sheet or the Income Statement.

Where it shows up

Balance Sheet: Related to the open receivables the note is meant to clear.

Cash flow: Related to the payment that arrives with the note.

P&L: Related to nothing extra.

See also: Cash Application · Invoice · Accounts Receivable

You will not see this note as its own line on the statements. It lives in the payment packet: a check stub, an email, or a file the bank forwards with a deposit.

When you look at accounts receivable, the note is the map to the open bills that cash should clear. Receivables fall only after someone uses the note to match that cash to an invoice.

Nothing extra hits the Income Statement when the note arrives. The bakery already recorded revenue when it billed the cafe.

A statement of account later shows the same payment as a credit. If the note never came, those invoices stay open even though the money is in the bank.

How it works

The customer decides which open bills a payment will cover. They write the invoice numbers and amounts on a stub, a letter, or a one-line email.

That list travels with the check, or follows an electronic transfer. Some banks pass the list along as extra data on the deposit.

The seller reads the list before treating the cash as payment on any given bill. The matching work is a separate step, covered on another page.

A useful note is small. Invoice number, amount, and a date are enough for most shops.

If the customer short-pays, the note should say why. "Inv 118 $230, $20 spoiled loaves" tells the bakery not to chase the last twenty dollars until someone reviews the claim.

A credit memo is issued by the seller, not by the customer. The customer's note may refer to a credit, but the credit itself is a different document.

When the note is missing, the payment is still real. That cash waits until someone asks the customer what the money was for.

Electronic payments often hide the note. A bank transfer can land as a bare $400 while the email that named the bills sits in another inbox.

Some customers send one note that covers many invoices. The cafe's $400 list naming two bread invoices is that pattern.

Example

A cafe owes a bakery $250 on invoice 118 and $150 on invoice 121. On Friday the cafe mails a $400 check and a one-line list: "Inv 118 $250, Inv 121 $150."

The bakery deposits the check the same day. Cash in the bank is up $400, and both invoices are still open.

A bookkeeper later reads the list and matches $250 to 118 and $150 to 121. After that match, both invoices are paid in full.

If the cafe had mailed the same $400 with a blank stub, the bakery would still have the cash. Someone would have to call the cafe to ask which bills the check was for.

The one-line list did not change current assets on its own. Cash up and receivables down happen when the payment is deposited and then matched.

Common mix-ups

The note is not the payment. The payment is the check or the bank transfer, and the note is the explanation that rides with it.

The note is not an invoice. An invoice is what the seller sent to request money, and remittance advice is what the customer sends back to explain the money.

The note is not a statement of account. A statement is a summary the seller mails out, and remittance advice runs the other way.

The note is not a ledger posting. Reading the list and closing invoices is a later step that relies on this source.

Related terms

• Cash Application: Matching incoming customer payments to the right open invoices.
• Invoice: The document that bills a customer and creates a receivable.
• Accounts Receivable: Money customers owe the business for goods or services already delivered.
• Statement Of Account: A summary sent to a customer listing all open invoices and payments.
• ACH Payment: An electronic bank-to-bank transfer used for routine payments.
• Lockbox: A bank service that receives and processes customer payments on your behalf.
• Unapplied Payment: A received payment not yet matched to an invoice.
• Source Document: The original receipt, bill, or statement that supports an entry.