What is Remittance Advice and How Does it Work?
What is Remittance Advice?
Remittance advice is a detailed notification of the payment amount sent by a payer to a payee. Examples are customer to vendor or supplier, employer to employee, bank or money transfer company to the receiver of funds, or from a claims processor to a healthcare provider as electronic remittance advice (ERA) when patients’ insurance claims are paid.
What is the Value of a Remittance Advice?
Electronic remittance advice or paper remittance advice is used by businesses that make online payments to their suppliers.
For businesses paying suppliers, remittance advice notifies the vendor of the payment amount and status and which invoice numbers have been paid, offset by any account credits. Remittance advice simplifies the record-keeping process of applying the payment amount to specific invoices included in their customer’s accounts receivable balance.
The value of the payroll remittance advice provided to business employees is understanding and verifying that the amount received is correct.
Financial institutions and money transfer companies make requested payments and send remittance to recipients, like independent contractors or friends and family members. Payment methods include electronic bank account transfers using U.S. ACH (Automated Clearing House), global ACH for international payments, wire transfer, member account to member account, or eWallet funds transfers.
A payment remittance advice notifies the recipient of the amount of money paid, the payer, the payee, the payment date, the date the funds are expected to be received, details, and a transaction reference number. The recipient’s payment remittance advice is used to plan and follow-up on any electronic fund transfers (EFTs) not received.
ERA is used by claims processors, including Medicare and insurance companies, that pay healthcare providers, giving required details, claims payment amounts, and when they’re paid. Electronic remittance advices let providers manage cash flow and patient account details, allowing them to change incorrect billing codes or bill patients or supplemental policy insurers for allowable charges.
How Do Businesses Generate Remittance Advice?
Software programs may automatically generate the remittance advice and email it to the payment recipient. Check the features of your accounting software/ERP system. If the send remittance feature isn’t included, integrate third-party add-on software that uses either a flat-file or API connection.
Templates in Microsoft Word or Excel, Google Docs, Sheets, or Forms can be used to customize the remittance advice for each payment recipient.
Remittance advices can also be paper-based.
For online invoices and payments, EDI (Electronic Data Interchange) is an older standard for communication between trading partners who conduct business. In 2015, eft surveyed supply chain executives about EDI usage, as reported by Reuters. The eft survey results indicate that EDI was still being used, but web-service API may eventually replace EDI.
What Does a Remittance Advice Look Like?
Remittance advice notifies the recipient of a payment, with details included. Remittance advice may be an electronic notification or a paper-based document. Paper remittances include a detailed check stub or perforated invoice or billing account statement section that is detached and mailed with the payment, indicating the amount paid.
What Details Does a Business Remittance Advice Include?
Remittance advice is a detailed statement of the payment amount by invoice number generated and sent by a purchaser to a vendor or supplier when one invoice or a batch payment of multiple invoices is made, or to an employee.
Business remittance advice details include:
- Payer name and contact information
- Payee name and contact information
- Method of payment
- Payment date
- Payment amount
- Invoice date
- Invoice number
- Amount paid by invoice number (or payroll period)
- Amount of any credit issued with identifying credit number(s)
- Other required details
- An email address if the electronic remittance advice is emailed
- Expected receipt date if an electronic funds transfer is not immediate.
Employers paying employees provide details, including the payment amount and date, payroll period, earnings, hours for hourly workers, overtime, and paycheck deductions that include withheld taxes and 401(k) or other retirement plan contributions. Payroll payment notification can be either on electronic remittance advice or a paper paycheck stub.
How a Seller Handles a Customer Remittance Advice
Steps for seller handling customer’s remittance advice:
- Receive a detailed bank account deposit.
- Enter or review an automatic software transaction to record the customer’s payment.
- Debit (increase) cash account
- Credit (reduce) accounts receivable in the customer’s account
- Research and follow-up payment discrepancies.
- Run and review accounts receivable aging report by customer.
Is a Remittance Advice Proof of Payment?
No. Remittance advice is a notification that a payment was processed, informing the payee. The payment may not reach the intended receiver. For example, wire transfer funds don’t always reach the recipient because of information errors or problems completing a global transaction. Auditors don’t rely on payment remittance advice to confirm the existence of a cash receipt.
Remittance Advice – In Summary
Remittance advice is used by the payer who makes a payment to inform the payment recipient. The remittance advice includes details that vary by payment purpose and type.
Businesses include payment date, invoice dates, invoice numbers, and invoice amounts, or payroll information to employees. Financial institutions and money transfer companies provide payment details, payment amount and date, and the expected date for receiving funds. Claims processors provide approved claims amounts and payment details for payments to healthcare providers.
Electronic remittance advices or paper-based payment remittances are used for business payments to suppliers, contractors, and employees. Electronic remittance advice in healthcare (in EDI format) is used for insurance claim payments made by the government and health insurance companies.
Financial institutions, like banks, credit unions, securities brokers, and money transfer companies make payments and send remittance advice for payers to payees who receive the funds.