Credit note - What is a credit note?
A credit note (also known as credit memo) is issued to indicate a return of funds in the event of an invoice error, incorrect or damaged products, purchase cancellation, or otherwise specified circumstance.
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If you return goods to a supplier, or if a customer returns goods to you, for either full or partial credit, a credit note must be issued so that you and your customer can process it and make the according adjustments in your books.
A credit note is a document issued to record in your accounts that a particular amount was returned to the customer for a paid (or partially paid) invoice. It is also sent to your customer to indicate the cancellation of the payment in the original invoice.
This amount can also be used to offset future purchases from the same customer, for example, if a new order is placed with necessary corrections.
You can issue as many credit notes as you like according to the same invoice, as long as you do not exceed the total invoice amount.
When to issue a credit note
There are two types of credit notes:
- Those issued for outgoing payments
- Those issued for incoming payments
In other words, a credit note can be received or issued by a business. For small business owners, both types are common.
There are several situations in which a credit note should be issued. Some common cases when to issue a credit note are the following:
- If you receive goods from a supplier that must be returned due to damage, or fault - or simply do not meet the buyers specifications
- Correcting any invoice mistakes (e.g. invoice amount overstated)
- Correct discount rate is not applied to invoice
- Goods damaged within the warranty period
- Cancel out any awaiting payments on invoices
In these cases, the original invoice can be cancelled with the issuance of a credit note, and thereafter a corrected invoice can be issued. If you intend to buy more from that supplier, the amount specified can be offset against future purchases or you may request a refund of your payment.
Credit note example
The process of issuing a credit note for an invoice is fairly straightfoward. Typically, credit notes should be sent to the customer for which they are issued, as well as retained by the issuing business.
Company X purchases £65 of products from Company Y. Company X contacts Y to inform them that there is an error on the invoice so the order cannot be completed.
Company Y issues a credit note on the original invoice and sends it to X, cancelling the invoice and recording the amount stated (£65) as positive under accounts payable. Company X can then use the £65 stated in the credit note towards future orders, or request a refund.
Credit notes in accounting
In traditional accounting practices, credit notes would be entered as a credit in the sales book for that particular customer (crediting their account for the specified amount).
In double-entry bookkeeping systems, the credit note would be entered as a debit under revenues, and a credit under accounts receivable. Each credit note should be recorded, and updated in the appropriate accounts to match the balance (such as stock, in the case of returned products).
Credit Notes in Debitoor
Thankfully, online invoicing and accounting software like Debitoor remove the necessity to ensure that each credit note is marked down in your books accordingly. A credit note is automatically linked to the invoice for which it is created, has its own unique number, and is reflected in the amount due for the invoice.
As mentioned above, with Debitoor you can raise a credit note based on the original invoice, but you can also create a credit note without the original invoice if required.
In Debitoor, credit notes have their own tab and numbering system to easily distinguish them from invoices. They can also be customised like your invoices to create unique and professional documents.
Find out how to create a credit note with Debitoor, or sign up for our seven-day free trial.
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