Cropped businesswoman leaning against a white building | What is a credit note?

Contents

  1. 1. What is a credit note?
  2. 2. When to issue a credit note
  3. 3. What information is on a credit note?
  4. 4. Credit note example
  5. 5. What is a credit note in accounting?
  6. 6. Credit note vs debit note – what’s the difference?

What is a credit note?

March 10, 2023
As a small business owner, you’ll know that sometimes things don’t go according to plan. Mistakes can happen, and if you make a mistake in the invoicing process, you may need to raise a credit note.In this guide, we’ll explain how and when to issue a credit note, as well as explain the differences between credit notes and debit notes.

What is a credit note?

Otherwise known as a credit memo, credit notes are legal documents that allow you to cancel out all or part of an invoice you’ve already issued.As a seller, you’d need to issue a credit note to a customer to let them know credit is being applied to their account. To balance your own books, a copy of every credit note issued should be filed by you, too.You can use the amount stated on a credit note to offset any future purchases made by the same customer as to not disrupt your cash flow. It’s also possible to issue multiple credit notes for the same invoice, although the total amount credited must not exceed the total gross value of the invoice.

When to issue a credit note

There are two types of credit note:
    Those used for incoming paymentsThose issued for outgoing payments
This means that a business can both receive and issue credit notes and, as a business owner, there’s a chance you’ll encounter both at some point.You’ll need to issue a credit note if:
    You’ve issued an invoice by mistake and your customer doesn’t need to payYou’ve overcharged a customer in error or the invoice contains a pricing mistakeYour customer isn’t happy with your goods or service and you’ve agreed to give them a full or partial refundAn order is changed after an issue has been issuedGoods are damaged during shipping
In these examples, the existing invoice would be cancelled by the issuing of a credit note, and a new invoice would be raised and sent to the customer.If the customer makes regular purchases from you, you could either offset the credit amount against future purchases, or issue a refund.

What information is on a credit note?

At first glance, a credit note is a lot like an invoice, but the format and structure is slightly less strict.For administrative purposes, there’s information that must be a credit note must contain for admin purposes so that both you and your customer can easily identify trace it back to the original invoice.
    Date the credit note has been issuedCredit note numberPayment termsCustomer reference numberAmount of creditContact detailsReason why the credit note has been issued
To avoid your customer confusing a credit memo with an invoice, it’s important to clearly label the document as a credit note in the header.If your original invoice included VAT — Value Added Tax — you’ll also need to issue a corresponding VAT credit note. This should reflect all the details of the invoice, including the net total or amount before VAT.

Credit note example

Below is a worked example of how to use a credit note:Company A places a purchase order with Company B for £100 worth of products. Company A then advises Company B that the invoice contains an error.
    Company B acknowledges the error, so issues a credit note against the original invoice, which they send to Company A. The credit note cancels the invoice and records the amount stated - £100 as positive under accounts payable.If Company A has already paid the value of the invoice to Company B, then they can use the £100 credit either towards future purchases, or they can request a refund. If A has not yet paid B, the credit note will cancel the amount due, while also balancing Company B’s books.
If you use accounting software, such as Ember, you can issue credit notes hassle-free.

What is a credit note in accounting?

If you’re using traditional accounting practices, you need to enter a credit note as a credit under sales for the customer and then credit their account for the specified amount.If you’re using a double-entry bookkeeping system, you’ll need to enter the credit note as debit under revenues and the credit under accounts receivable.Each credit note should be recorded and updated in the appropriate accounts to match the balance, for instance stock if products are returned.

How long do I need to keep a credit note for?

Legally, a credit note is required to be stored for a minimum of 6 years, together with the relevant invoices.

Credit note vs debit note – what’s the difference?

While credit notes are issued by sellers to credit a buyer’s account, a debit note — or debit memo — is a document issued to a seller by a buyer in order to notify them of current debt obligations.Debit notes tend to be used in business-to-business (B2B) transactions, when goods or services are supplied before an official invoice is sent, with the debit note used to ‘make note’ of the transaction for documentation.Debit notes can also be used when a customer returns goods to a business that they’ve received on credit. In circumstances such as these, the buyer would then issue the debit note to the seller.
Caroline Wire
Caroline WireFreelance Copywriter

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