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.
Create professional credit notes for free with SumUp Invoices.
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.
Issuing a credit note allows you to record that:
A particular amount was returned to the customer for a paid (or partially paid) invoice, or,
That a customer's due payment on an invoice was cancelled
This document is filed by the business to balance their books and is also sent to the customer to indicate the cancellation of the payment on the original invoice.
The amount indicated on the credit note can also be used to offset future purchases from the same customer, for example, if a new order is placed with necessary corrections. Multiple credit notes can be issued for the same invoice. However, the total amount credited should not exceed the total gross amount of the invoice.
When to issue a credit note
There are two types of credit notes:
Those issued for incoming payments
Those issued for outgoing payments
What this therefore means is that a credit note can be both issued and received 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:
To correct any invoice mistakes (e.g., invoice amount overstated, the correct discount is not applied to the invoice)
To cancel any awaiting payments on an invoice
To provide a refund if goods are damaged within the warranty period
If you receive goods from a supplier that must be returned (e.g., due to damage, or fault - or simply don't meet the buyer's specifications)
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 straightforward. Typically, credit notes should be sent to the customer for whom they are issued, as well as retained by the issuing business.
A credit note may be used in the following way:
Company A purchases £65 of products from Company Z. Company A contacts Z to inform them that there is an error on the invoice.
Company Z issues a credit note on the original invoice and sends it to A, cancelling the invoice and recording the amount stated (£65) as positive under accounts payable.
If Company A has already paid Company Z, they can then use the £65 stated in the credit note towards future orders or request a refund. If A is yet to pay Z, the credit note cancels what is due and balances Company Z’s books.
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 debit under revenues, and 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 SumUp Invoices
Thankfully, online invoicing software like SumUp Invoices removes 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's created, has its own unique number, and is reflected in the amount due for the invoice.
As mentioned above, with SumUp Invoices 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 SumUp Invoices, credit notes have their own tab and numbering system to easily distinguish them from invoices. Just like your invoices, they can also be customised with your company logo to create unique and professional documents.Create credit notes for free