What is Cash application?
Cash application is the accounts receivable step of matching incoming customer payments to the open invoices they settle, so each invoice is closed and the customer's balance is correct.
In more detail
When a payment arrives, finance has to decide which invoices it covers. That is easy when a customer pays one invoice in full with a reference. It gets hard with short payments, deductions, one payment covering many invoices, missing references and remittance advice sent separately by email or portal. Unapplied cash leaves invoices looking overdue, which triggers needless reminders and distorts DSO. Automation reads the remittance advice, matches on amount, reference and customer history, applies the clear matches and sends the rest to an analyst with suggested matches. Finance sets the matching rules and the tolerance for small differences. We don't let an agent write off a short payment or post a deduction without approval.
Example
For example, a customer wires 41,300 dollars against 12 invoices and emails a remittance PDF. The system reads the list and applies 11 exact matches. It flags one invoice paid 120 dollars short, with the likely reason from the remittance note, for an analyst to resolve.