Unallocated payments are where the client has given you more money than they owe. You need to account for the deposit of funds going into your account (so that your bank account reconciles) but you only apply it towards an invoice (or invoices) less than the amount being deposited. For example, the client owes $100 but they pay you $300. If those funds are paid into trust then you can hold the surplus funds in trust for future use. If the funds were paid into your business account though you need to be able to deal with them.

There are three things that you can do with these funds (see below for each option):

1 Apply the funds to another invoice

If you have another invoice you can apply the funds to that invoice. If you do not have an invoice currently you can leave the funds as unallocated until you create a new invoice but be aware that the new invoice will have to be dated on or before the unallocated payment was processed.

To allocate unallocated funds simply edit the existing transaction. You can find the transaction by looking under Accounting > Sales > Deposits. Use the search function in the top right to find the unallocated payment or sort by the last column so that it shows the unallocated payment at the top of the list.

For that link click the menu icon to the very left of the line and choose Edit Payment.

This will bring up the payment as you made it originally. You will now be able to apply the unallocated funds to the new invoice.

2 Create a Credit Note to be applied later

This is a four step process. You will firstly have to:

1. Create a new invoice manually. Go to your invoice screen (Accounting > Sales > Invoice) and click the Create Invoice button.  Make it out to the same client and make sure that the invoice is dated on or before the unallocated payment was made. Within the invoice create a line item for the unallocated amount. This line item can be coded to whichever income account you would like, since you will be creating a credit note in a later step the whole process should not affect your balance sheet.
2. Allocate the funds to an invoice to the newly created invoice. Just like in the options above under Apply the funds to another invoice above.
3. Create a credit note for the invoice you just paid. You can find out more details on how to do this here: Credit your Clients.

3 Refund the funds to the client

This is effectively the same option as in Create a Credit Note to be applied later above but once you create the credit you will have to refund the money back to the client. See: Refunding the Credit to the Client