Payment vs settlement: what's the difference?
These two words are used interchangeably in most software, and the conflation quietly removes several things you need to be able to say.
The distinction
A payment is an event on a rail: an amount left one party and arrived at another, at a time, with whatever identifying detail the rail carried.
A settlement is a statement about an obligation: this obligation has been discharged, in whole or in part, by these means. The means might be a payment. It might also be a credit balance, a waiver, an adjustment, or a write-off — none of which involve money moving at all.
What the conflation costs you
Four things become inexpressible when payment and settlement are the same record.
- One payment settling several obligations — a company transfer covering eighteen memberships.
- One obligation settled by several payments — school fees paid in four installments.
- An obligation settled without a payment — a waiver granted by a committee.
- A payment that settles nothing yet — money received before anything was billed.
The allocation is the interesting record
Between the payment and the obligation sits an allocation: this much of that payment discharged this much of that obligation, matched by this rule or this person, at this time.
That record is what makes it possible to unwind a mistake without destroying evidence, to explain a balance to somebody who disagrees with it, and to handle a reversal months later without leaving a phantom credit behind.
A test for your current system
Take a payment that settled two obligations partially. Can your system tell you how much of it went to each, and what matched it? If the answer is a note in a comment field, payment and settlement are the same record and the allocation was never stored.