I've two types of custom payment documents that have the similar process, once is posting and applying without errors but the other is showing the error message.
Below is the error
Cannot post because you did not specify which entry to apply. You must
specify an entry in the Applies-to ID field for one or more open
entries.
I've realized that I was using different customers on the both documents that I was settling against each other. What day and half wasted.
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