Default Application Rule
This feature is only available if you have Invoice Settlement enabled. The Invoice Settlement feature is generally available as of Zuora Billing Release 296 (March 2021). This feature includes Unapplied Payments, Credit and Debit Memos, and Invoice Item Settlement. If you want to have access to the feature, see Invoice Settlement Enablement and Checklist Guide for more information.
The default application rule governs how Zuora allocates payment and credit memo applications across invoice or debit memo items. You can configure the application rule to set the default system behavior according to your needs. Zuora uses the default application rule to allocate item-level applications if you have not provided item-level application amounts explicitly.
Navigation: Click your user name at the top right and navigate to Payments > Configure Application Rule.
The following application rules are supported:
- First In First Out
- Proration (default)
Currently, unapplying payments and credit memos, and refunding credit memos only support FIFO application rule.
First In First Out
The following operations support the FIFO application rule:
- Apply payments or credit memos to invoices and debit memos
- Unapply payments or credit memos from invoices and debit memos
- Refund credit memos
With the FIFO application rule, Zuora allocates a payment or credit memo to an invoice or debit memo at the item level. Only after the previous item of the invoice or debit memo has been fully settled, will the next item be allocated. The items of the invoice or debit memo are ordered randomly.
See the example below for more information.
Proration
Zuora prorates the amount to be paid for an invoice or debit memo at the item level.
- Payment: A prorated portion of the payment is applied to every item of the invoice or debit memo.
- Credit memo: Zuora prorates the credit memo at the item level. A prorated portion of each credit memo item is applied to every item of the invoice or debit memo.
See the sections below for detailed information about calculating proration.
Note that only the credit memo items with positive unapplied amount can be applied to invoices and debit memos. Only invoice items and debit memo items with positive balance need to be settled.
The currency rounding rule is applied in the proration.
Proration of a Credit Memo
Use the formulas below to calculate the amount of each credit memo item that is applied to an invoice or debit memo. Zuora prorates the credit memo items in random order.
For each credit memo item:
- If it is not the last item of the credit memo, use the formula below for each credit memo item:
Item_amount_to_apply = Total_amount_to_apply * Proration_percentage
Item_amount_to_apply is the amount of the credit memo item to be applied.
Total_amount_to_apply is the total amount of the credit memo to be applied.
Proration_percentage is the proportion of the unapplied amount of the credit memo item to the total unapplied amount of the credit memo.
Proration_percentage = Item_unapplied_amount / Total_unapplied_amount
Item_unapplied_amount is the unapplied amount of this credit memo item.
Total_unapplied_amount is the total unapplied amount of the credit memo.
Total_unapplied_amount = Sum (Item_unapplied_amount)
Total_unapplied_amount is the sum of the unapplied amount of all the credit memo items. Note that only the items with positive unapplied amount are included in the application. - If it is the last item of the payment or credit memo:
Item_amount_to_apply = Total_amount_to_apply - Sum (Item_amount_to_apply)
Sum (Item_amount_to_apply) is the sum of the amount of all the other items (except the last item) to be applied.
See the example below for more information.
Proration of an Invoice or Debit Memo
Use the formulas below to calculate the amount of each invoice item or debit memo item that is paid by a payment or credit memo item. Zuora prorates the items of the invoice or debit memo in random order. If you apply a credit memo to an invoice or debit memo, you need to use the following formulas for each memo item.
- If it is not the last item of the invoice or debit memo, use the formulas below for each invoice item or debit memo item.
Paid_amount = Total_amount_to_apply * Proration_percentage
Proration_percentage = Item_Balance / Total_balance
Paid_amount is the amount of the payment or credit memo item that is paid for this invoice item or debit memo item.
Total_amount_to_apply is the amount of the payment or credit memo item to be applied. For credit memo items, this is the amount you get from the Prorating the Payment or Credit Memo section. For payments, this is the total amount of the payment you want to apply.
Proration_percentage is the proportion of the balance of the invoice item or debit memo item to the total balance of the invoice or debit memo.
Item_Balance is the balance of this invoice item or debit memo item. After a payment or credit memo item is applied, the balance of the invoice item or debit memo item is decreased. In such cases, the item balance needs to be recalculated.
Total_balance is the total balance of the invoice or debit memo.Total_balance = Sum (Item_Balance)
Total_balance is the sum of the balance of all the invoice items or debit memo items. Note that only the items with the positive balance are included in the application. After a payment or credit memo item is applied to an invoice item or debit memo item, the balance of the invoice item or debit memo item is decreased. In such cases, the total balance needs to be recalculated. - If it is the last item of the invoice or debit memo:
Applied_amount = Total_amount_to_apply - Sum (Paid_amount)
Sum (Paid_amount) is the sum of the paid amount of all the other invoice items or debit memo items (except the last item).
See the example below for more information.
Examples for applying credit memos
For example, your customer has a credit memo. The credit memo details are as follows.
| Credit Memo Items | Unapplied Amount |
|---|---|
| Memo Item 2 | $30 |
| Memo Item 3 | $40 |
| Memo Item 1 | $20 |
| Memo Item 4 | - $10 |
You want to apply $60 of this credit memo to pay an invoice. The invoice details are as follows.
| Invoice Items | Balance |
|---|---|
| Invoice Item 3 | $40 |
| Invoice Item 1 | $40 |
| Invoice Item 2 | $80 |
| Invoice Item 4 | -$10 |
FIFO rule to apply the credit memo
Suppose you choose to use FIFO rule to apply the credit memo. The amount of the credit memo you want to apply to this invoice is $60.
The credit memo is applied to the invoice in the following way:
- $40 of the credit memo is applied to the Invoice Item 3. The Invoice Item 3 is fully paid. The amount of $20 is left in the credit memo.
- $20 of the credit memo is applied to the Invoice Item 1. The full amount of the credit memo is then applied. The reminding balance of Invoice Item 1 is $20.
The invoice details after applying the credit memo are as follows.
| Invoice Item | Balance |
|---|---|
| Invoice Item 3 | 0 |
| Invoice Item 1 | $20 |
| Invoice Item 2 | $80 |
| Invoice Item 4 | -$10 |
Proration rule to apply the credit memo
Suppose you choose to use proration rule to apply the credit memo.
Prorate the credit memo
The total unapplied amount of the credit memo is $90 (= $30 + $40 + $20). The amount of credit memo you want to apply to this invoice is $60.
| Credit Memo Items | Unapplied Amount | Amount To Apply | Proration Rule |
|---|---|---|---|
| Memo Item 2 | $30 | $20 | $60 * ($30 / $90) |
| Memo Item 3 | $40 | $26.67 | $60 * ($40 / $90) |
| Memo Item 1 | $20 | $13.33 | Last item: $60 - ($20 + $26.67) |
| Memo Item 4 | - $10 | 0 | Negative unapplied amount is not included in the proration rule |
Prorate the invoice
The balance of the Invoice Item 4 is negative, so it is not paid.
- Apply the Memo Item 2 to each invoice items. Total balance of the invoice is $160 = ($40 + $40 + $80).
Credit Memo Items Amount to be applied Invoice Items Item Balance Settled Amount Proration Rule Remaining Balance Memo Item 2 $20 Invoice Item 3 $40 $5 $20 * ($40 / $160) $35 Invoice Item 1 $40 $5 $20 * ($40 / $160) $35 Invoice Item 2 $80 $10 Last item: $20 - ($5 + $5) $70 - Apply the Memo Item 3 to each invoice items. Now, the total balance of the invoice is $140 = ($35 + $35 + $70).
Credit Memo Items Amount to be applied Invoice Items Item Balance Settled Amount Proration Rule Remaining Balance Memo Item 3 $26.67 Invoice Item 3 $35 $6.67 $26.67 * ($35 / $140) $28.33 Invoice Item 1 $35 $6.67 $26.67 * ($35 / $140) $28.33 Invoice Item 2 $70 $13.33 Last item: $26.67 - ($6.67 + $6.67) $56.67 - Apply the Memo Item 1 to each invoice items. Now, the total balance of the invoice is $113.33 = ($28.33 + $28.33 + $56.67).
Credit Memo Items Amount to be applied Invoice Items Item Balance Settled Amount Proration Rule Remaining Balance Memo Item 1 $13.33 Invoice Item 3 $28.33 $3.33 $13.33 * ($28.33 / $113.33) $25 Invoice Item 1 $28.33 $3.33 $13.33 * ($28.33 / $113.33) $25 Invoice Item 2 $56.67 $6.67 Last item: $13.33 - ($3.33 + $3.33) $50
The invoice details after applying the credit memo are as follows.
| Invoice Item | Balance |
|---|---|
| Invoice Item 3 | $25 |
| Invoice Item 1 | $25 |
| Invoice Item 2 | $50 |
| Invoice Item 4 | -$10 |
Examples for applying payments
For example, your customer has a payment with the total amount of $1,284, and wants to apply it to an invoice. The invoice has the total amount of $1,284, and contains the following items:
| Invoice Items | Balance |
|---|---|
| Invoice Item 1 | -$1,200 |
| Taxation Item 1 | -$84 |
| Invoice Item 2 | $2,400 |
| Taxation Item 2 | $168 |
Suppose you choose the FIFO rule to apply the payment to the invoice. The amount of the payment you want to apply to the invoice is $1,284.
The payment is applied to the invoice in the following way:
- The total amount of the payment is fully applied to Invoice Item 2 with the amount of $2,400.
- No balance is left after the application.
Limitations of the default application rule
If the invoices to be applied contain discount taxation items, the item-level applying amounts may not calculate as expected, as the application rule currently doesn’t recognize discounts on taxation items.
To ensure that the item-level applying amount is calculated properly, we recommend you avoid generating discount taxation items on the invoices.