The following situation might sound familiar: an invoice is sent to a customer but it soon becomes clear that there are errors. Errors on an invoice that can result in long, drawn out communications to fix it or worse, if it’s not caught, a return of the merchandise.
If you catch the mistakes in time, what is the next step? How can they be resolved quickly and correctly from an accounting and tax point of view? The issuance of an invoice requires a certain reaction: it must be paid. And this is where a credit note comes in.
When you need a credit note template
A credit note essentially allows you to enter a form of payment on an invoice to effectively ‘cancel-out’ the amount due. Depending on why you need to cancel an invoice, a credit note could be the solution. Other possible scenarios could be if you know that you will not receive payment on a correct and valid invoice - this can be written-off in your expenses as ‘bad debt'.
A credit note is used in instances when it is necessary to reissue an invoice due to errors that impact the sale of goods or services. This is because, in most cases, an invoice cannot simply be deleted. Deleting an invoice will cause either a gap in your invoice numbers or a mismatch between the invoice number and issue date, neither of which are received well by HMRC.
To be more specific, credit notes should be issued in the following more common scenarios: When the original invoice amount is incorrect, and needs to be amended before payment is made (for example, if the total is for £800 but was meant to be £80, you could issue a credit note for £720).
- When a customer has requested a refund after they have paid the invoice.
- When a customer has partially paid an invoice but has requested to pay less than the full amount (for example, if something didn’t meet their expectations, or if they disagree with the amount of VAT).
- When a customer requests a discount after an incorrect amount is issued on a service. For example if after you issue a credit note to correct the invoice amount to £80, the customer requests 25% off for poor service. A refund would then need to be issued for £20.
Basically, any major change to the amount on the invoice requires issuing a credit note.
The credit note in your invoice sequence
When a credit note is issued, it should also have a unique number, and fall in part of your invoice number sequence. Note that it will not have the same number as the invoice for which it is created, but a unique number all its own.
However, the credit note must reference the invoice number of the invoice for which it was issued, and all amounts on the invoice should be in the negative. For example, when creating a credit note to cover £720, the amount on the credit note should read: £ -720.00.
Whenever you issue a credit note, it’s advisable that you also send a copy to your customer, so that he has documentation confirming the refund or cancellation.
Creating a credit note with Debitoor
Fortunately, with invoicing software like Debitoor, issuing an invoice is as easy as just a few clicks. Simply open the invoice for which you’d like to issue a credit note, click ‘...More’ and select ‘Create >’ and choose ‘Credit note’. You’ll then be taken to a credit note template where you can adjust the details as necessary.
When you save your invoice, it is automatically assigned a unique number according to the invoice number sequence you’re using in your Debitoor account. It will also reference the invoice number of the invoice for which you have created it. From there, you can easily forward it to your customer just like an invoice, and you’ll always have a copy for your own records.