The role of a credit note in invoicing
In this article, you’ll learn:
When to use a credit note
What information a credit note should include
The easiest way to issue a credit note
How to register credit notes in your accounting software
If you’re familiar with the invoicing process, you’ve more than likely heard of a credit note. It’s possible you’ve issued one before or been on the receiving end of a credit note. But it can be slightly confusing when it comes to knowing when and how to issue a credit note.
Credit notes are typically connected to an invoice and allow complete or partial cancellation of a sale. Because there are strict laws around deleting invoices in many countries, a credit note should be used instead to cancel the sale.
The sales process can involve a number of different documents, from quotes to proforma invoices, delivery notes to reminders, and in some cases, credit notes.
As mentioned above, a credit note is used in situations where an invoice needs to be cancelled. This provides a legally acceptable way to keep the record of the sale in your accounts while clearly indicating that the order was cancelled and a specified amount of funds were returned.
However, a credit note can also be issued in the case that there's a change to an order - meaning that the invoice must be edited and re-issued. This can occur if there's a mistake in the order or if there's an error on the invoice.
In addition, if a customer wishes to amend their order, for example, to reduce or increase the quantity of a product, or remove one (or several) products altogether, this would change the total of the invoice.
This change to the invoice typically requires it to be re-issued. Since a completed invoice should never be deleted, a credit note can be issued to effectively remove the amount from your finances (cancel it out).
Credit notes follow a general outline, much like quotes and invoices. While invoices have a strict format and set of requirements to ensure they're legally binding, quotes have a less strict structure.
Credit notes that also include VAT have a clear set of requirements. Essentially, a VAT credit note should reflect the details of the VAT invoice. Specifically, why it is being issued, the total amount to be credited, the amount before VAT, and the original invoice number and date.
An issued credit note is generally directly linked to an invoice. However, there are situations in which a stand-alone credit note can be issued, which can be applied to an invoice at a later time or can be applied to a different income source.
Creating a credit note with the necessary details doesn’t need to be complicated. Invoicing software provides a ready-made template that allows you to generate a credit note directly from an existing invoice.
This automatically links the credit note to the invoice and transfers the information from the original invoice to the credit note template. It can then be edited, if necessary. For example, if it's only a partial credit note, certain lines can be removed and amounts adjusted.
The credit note will then receive its own unique number, allowing you to manage your records effectively and without gaps in your invoice numbers.
When it comes to the financial records of your business, managing credit notes is fairly straightforward. Depending on at what point in the sales process the credit note is issued determines how it's handled in traditional double-entry bookkeeping methods.
For example, a credit note issued before an invoice is paid (for example, correcting a mistake) is debited the specified amount under ‘Revenue’ and credited under ‘Accounts Receivable’ for the particular customer, effectively crediting their account with your business.
However, if goods are returned and a refund is provided, the credit note issued would simply be recorded under ‘Revenue’, and ‘Accounts Receivable’. These entries adjust the amount of revenue recorded in your accounts.
If you’re working with online invoicing & accounting software, like SumUp Invoices, the bookkeeping is built-in, meaning that as soon as you create a credit note it’s automatically linked to the original invoice and the balances are updated.
Editing, cancelling, or refunding an invoice can be a pain. But credit notes can be simple to issue. Online invoicing software makes this possible by providing templates for credit notes and automatically linking them to the corresponding invoice.