diff --git a/erpnext/accounts/doctype/payment_entry/payment_entry.js b/erpnext/accounts/doctype/payment_entry/payment_entry.js
index 0701435dfc..35092a7c4d 100644
--- a/erpnext/accounts/doctype/payment_entry/payment_entry.js
+++ b/erpnext/accounts/doctype/payment_entry/payment_entry.js
@@ -122,13 +122,10 @@ frappe.ui.form.on('Payment Entry', {
 		frm.set_query('payment_term', 'references', function(frm, cdt, cdn) {
 			const child = locals[cdt][cdn];
 			if (in_list(['Purchase Invoice', 'Sales Invoice'], child.reference_doctype) && child.reference_name) {
-				let payment_term_list = frappe.get_list('Payment Schedule', {'parent': child.reference_name});
-
-				payment_term_list = payment_term_list.map(pt => pt.payment_term);
-
 				return {
+					query: "erpnext.controllers.queries.get_payment_terms_for_references",
 					filters: {
-						'name': ['in', payment_term_list]
+						'reference': child.reference_name
 					}
 				}
 			}
@@ -1463,4 +1460,4 @@ frappe.ui.form.on('Payment Entry', {
 			});
 		}
 	},
-})
\ No newline at end of file
+})
diff --git a/erpnext/accounts/doctype/payment_entry/payment_entry.py b/erpnext/accounts/doctype/payment_entry/payment_entry.py
index 7542babe92..1e53c9bb48 100644
--- a/erpnext/accounts/doctype/payment_entry/payment_entry.py
+++ b/erpnext/accounts/doctype/payment_entry/payment_entry.py
@@ -228,10 +228,17 @@ class PaymentEntry(AccountsController):
 			d = frappe._dict(d)
 			latest_lookup.setdefault((d.voucher_type, d.voucher_no), frappe._dict())[d.payment_term] = d
 
-		for d in self.get("references"):
-			latest = (latest_lookup.get((d.reference_doctype, d.reference_name)) or frappe._dict()).get(
-				d.payment_term
-			)
+		for idx, d in enumerate(self.get("references"), start=1):
+			latest = latest_lookup.get((d.reference_doctype, d.reference_name)) or frappe._dict()
+
+			if (d.payment_term is None or d.payment_term == "") and d.payment_term not in latest.keys():
+				frappe.throw(
+					_(
+						"{0} has Payment Term based allocation enabled. Select a Payment Term for Row #{1} in Payment References section"
+					).format(frappe.bold(d.reference_name), frappe.bold(idx))
+				)
+
+			latest = latest.get(d.payment_term)
 
 			# The reference has already been fully paid
 			if not latest:
@@ -1633,6 +1640,9 @@ def split_invoices_based_on_payment_terms(outstanding_invoices, company):
 										"invoice_amount": flt(d.invoice_amount),
 										"outstanding_amount": flt(d.outstanding_amount),
 										"payment_term_outstanding": payment_term_outstanding,
+										"allocated_amount": payment_term_outstanding
+										if payment_term_outstanding
+										else d.outstanding_amount,
 										"payment_amount": payment_term.payment_amount,
 										"payment_term": payment_term.payment_term,
 										"account": d.account,
diff --git a/erpnext/controllers/queries.py b/erpnext/controllers/queries.py
index d1dcd6a109..5ec24743d9 100644
--- a/erpnext/controllers/queries.py
+++ b/erpnext/controllers/queries.py
@@ -874,3 +874,18 @@ def get_fields(doctype, fields=None):
 		fields.insert(1, meta.title_field.strip())
 
 	return unique(fields)
+
+
+@frappe.whitelist()
+@frappe.validate_and_sanitize_search_inputs
+def get_payment_terms_for_references(doctype, txt, searchfield, start, page_len, filters) -> list:
+	terms = []
+	if filters:
+		terms = frappe.db.get_all(
+			"Payment Schedule",
+			filters={"parent": filters.get("reference")},
+			fields=["payment_term"],
+			limit=page_len,
+			as_list=1,
+		)
+	return terms