A settlement is an accounting transaction that occurs on accounts payable, accounts receivables, and the general ledger. This transaction is used mainly to settle vendor invoices against vendor payments or advance payments:
It is necessary to classify posting profiles of the vendor and customer in the opening balance, as it will affect the settlement process.
The settlement transaction affects vendor and customer balances, and it is reported in the vendor or customer statement report that identifies the following:
- The vendor
- The open (unsettled) invoice and payments
- The closed (settled) invoice and payments
- The vendor balance
A settlement transaction can occur during a payment or collection transaction, if the accountant marks the invoice that will be paid or collected. On the other hand, the settlement can be performed at the vendor or customer level, and these transactions can be unsettled.
The settlement transaction should take into consideration the currency, as it can be performed in the company's home currency by an equivalent amount, which is calculated based on the currency exchange rate, or it can be settled in the same currency of the invoice by identifying the currency in the payment process.