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 | -$10 |
Examples for applying payments
Apply payment to the invoice by FIFO rule
Consider an invoice with the following details:
| Amount ($) |
Balance ($) (before the payment) |
|
|---|---|---|
| Invoice-01 | 1,284.00 | 1,284.00 |
| Invoice Item 1 | 2,400.00 | 1,200.00 |
| Taxation Item 1 | 168.00 | 168.00 |
| Discount Item 1 | -1,200.00 | 0.00 |
| Taxation Item 2 | -84.00 | -84.00 |
From a Balance perspective, Discount Item 1’s balance is $0 because it has been counted into its parent item, which is Invoice Item 1 in this case.
Let's say that you fully paid the invoice for $1,284.00. The payment amount is distributed to each item, and the final balance of each item is listed below:
| Amount ($) |
Balance ($) (before the payment) |
Payment amount ($) |
Balance ($) (after the payment) |
|
|---|---|---|---|---|
| Invoice-01 | 1,284.00 | 1,284.00 | 1284.00 | 0.00 |
| Invoice Item 1 | 2,400.00 | 1,200.00 | 1,200.00 | 0.00 |
| Taxation Item 1 | 168.00 | 168.00 | 84.00 | 84.00 |
| Discount Item 1 | -1,200.00 | 0.00 | 0.00 | |
| Taxation Item 2 | -84.00 | -84.00 | -84.00 |
The payment is applied to the invoice using the following logic:
- The maximum possible amount from the total payable amount is applied to the first positive item in the invoice.
- The same logic is followed, and the payment amount is applied to all the positive items in the invoice in the FIFO order until the total payable amount becomes $0.
- The total payment won't be distributed to the items with the negative amount in the invoice.
For example,
- $1,200.00 is applied to the first positive item, Invoice Item 1
- $84.00 is applied to the next positive item, Taxation Item 1
Apply payment to the invoice by Proration rule
Consider an invoice with the following details:
| Amount ($) |
Balance ($) (before the payment) |
|
|---|---|---|
| Invoice-01 | 1,284.00 | 1,284.00 |
| Invoice Item 1 | 2,400.00 | 1,200.00 |
| Taxation Item 1 | 168.00 | 168.00 |
| Discount Item 1 | -1,200.00 | 0.00 |
| Taxation Item 2 | -84.00 | -84.00 |
From a Balance perspective, Discount Item 1’s balance is $0 because it has been counted into its parent item, which is Invoice Item 1 in this case.
Let's say that you fully paid the invoice for $1,284.00. The payment amount is distributed to each item, and the final balance of each item is listed below:
| Amount ($) |
Balance ($) (before the payment) |
Payment amount ($) |
Balance ($) (after the payment) |
|
|---|---|---|---|---|
| Invoice-01 | 1,284.00 | 1,284.00 | 1284.00 | 0.00 |
| Invoice Item 1 | 2,400.00 | 1,200.00 | 1,200.00 / (1,200.00 + 168.00) * 1,284.00 = 1,126.32 | 1,200.00 - 1,126.32 = 73.68 |
| Taxation Item 1 | 168.00 | 168.00 | 1,284.00 - 1,126.32 = 157.68 | 168.00 - 157.68 = 10.32 |
| Discount Item 1 | -1,200.00 | 0.00 | 0.00 | |
| Taxation Item 2 | -84.00 | -84.00 | -84.00 |
The payment is applied to the invoice using the following logic:
- The total payable amount is applied to the first positive item in the invoice on a prorated basis.
- The same logic is followed, and the payment amount is applied to all the positive items in the invoice on a prorated basis.
- The total payment won't be distributed to the items with the negative amount in the invoice.
- For more information on the proration algorithm, see Proration of an Invoice or Debit Memo.
For example,
- The total payable amount is applied to all the positive items in the invoice on a prorated basis.
- For the last positive item, the payment amount is the total amount minus all the applied amount on other items.
Apply item group proration rule to the invoice
The Item group allocation proration rule feature is in the Early Adopter phase. If you want to access this feature, submit a request at Zuora Global Support.
Consider an invoice with the following details:
| Amount ($) |
Balance ($) (before the payment) |
|
|---|---|---|
| Invoice-01 | 180 | 180 |
| Invoice Item-01 | 81.97 | 81.97 - 8.2 = 73.77 |
| Taxation Item-01 | 18.03 | 18.03 |
| Discount Item-01 | -8.2 | 0 |
| Taxation item-02 | -1.8 | -1.8 |
| Invoice Item-02 | 81.97 | 81.97 - 8.2 = 73.77 |
| Taxation Item-03 | 18.03 | 18.03 |
| Discount Item-02 | -8.2 | 0 |
| Taxation item-04 | -1.8 | -1.8 |
Before applying the payment to the invoice, the invoice items will be grouped together along with their corresponding discount taxation items, as below:
| Amount ($) |
Balance ($) (before the payment) |
|
|---|---|---|
| Invoice-01 | 180 | 180 |
| Item Group-01 | N/A | 90 |
| Invoice Item-01 | 81.97 | 81.97 - 8.2 = 73.77 |
| Taxation Item-01 | 18.03 | 18.03 |
| Discount Item-01 | -8.2 | 0 |
| Taxation item-02 | -1.8 | -1.8 |
| Item Group-02 | N/A | 90 |
| Invoice Item-02 | 81.97 | 81.97 - 8.2 = 73.77 |
| Taxation Item-03 | 18.03 | 18.03 |
| Discount Item-02 | -8.2 | 0 |
| Taxation item-04 | -1.8 | -1.8 |
The payment is applied to the invoice using the following logic:
- Apply a 60$ payment to the invoice at the group-level basis proration rule.
- Distribute the item group-level payment amount into two parts, as follows:
- invoice item
- total tax items of the group
- Distribute the amount to each tax item as below:
| Amount ($) |
Balance ($) (before the payment) |
Amount ($) |
Balance ($) (after the payment) |
|
|---|---|---|---|---|
| Invoice-01 | 180 | 180 | 60 | 120 |
| Item Group-01 | N/A | 90 | 90 / (90 + 90) * 60 = 30 | 60 |
| Invoice Item-01 | 81.97 | 81.97 - 8.2 = 73.77 | 73.77 / (73.77 + (18.03 - 1.8)) * 30 = 24.59 | 49.18 |
| Taxation Item-01 | 18.03 | 18.03 | 30 - 24.59 = 5.41 | 12.62 |
| Discount Item-01 | -8.2 | 0 | 0 | |
| Taxation item-02 | -1.8 | -1.8 | -1.8 | |
| Item Group-02 | N/A | 90 | 60 - 30 = 30 | 60 |
| Invoice Item-01 | 81.97 | 81.97 - 8.2 = 73.77 | 73.77 / (73.77 + (18.03 - 1.8)) * 30 = 24.59 | 49.18 |
| Taxation Item-03 | 18.03 | 18.03 | 30 - 24.59 = 5.41 | 12.62 |
| Discount Item-02 | -8.2 | 0 | 0 | |
| Taxation item-04 | -1.8 | -1.8 | -1.8 |
The payment is applied to the invoice using the following logic:
- Payment with 60$ will be distributed to Item Group-01 and Item Group-02, then 30$ will be applied to Item Group-01.
- With Item Group-01, 30$ will be applied using the two parts basis proration rule explained below:
- Invoice Item-01
- Total of taxation items = Taxation Item-01 + Taxation Item-02
- Then Invoice Item balance = 73.77, the total balance of taxation items = (18.03 - 1.8) = 16.23
- Invoice Item that will be applied = 73.77/(73.77 + (18.03 - 1.8)) * 30 = 24.59
- Total taxation items that will be applied = 30 - 24.59 = 5.41
Within all the taxation items, the payment amount will be distributed to all the positive balance tax again by the proration rule. But in this case, there is only one positive tax, so 5.41$ will be applied to it.
Limitations of the default application rule
If the invoices to be applied contain discount taxation items, the item-level applying amounts and item-level balance may not calculate as expected, as the application rule currently doesn’t recognize discounts on taxation items.