Credit Note Accounting
What is a Credit Note?
Credit Note Definition
A credit note is a document issued to cancel all or part of a sales invoice. In other words, it is a negative invoice. It is also called a credit memo.
A credit note is part of the double entry bookkeeping process and is usually created in an accounting package like QuickBooks, Xero or FreshBooks.
When Should I Issue a Credit Note?
There are many reasons for issuing a credit note, including the return of goods, invoicing the wrong customer, damaged goods, a different amount, or the customer not being happy with the products or services provided.
The supplier will provide as many details as possible in the credit memo. It will generally reference the original invoice, describe the goods or services, quantities, and prices and explain the reason for the issue.
How to Issue Credit Notes
The easiest way to issue a credit note is to use invoicing software; the feature will be available to issue a credit. If you have issued an invoice, it is always good practice not to amend or delete it but to create a credit note. This means the records are still correct, and the customer has the same paperwork.
Depending on the accounting system used will depend on how you issue a credit note. If you are using an accounting package, there may be an option to issue a credit note directly from the invoice. This means some details have been posted for you, but you may need to make some adjustments. All accounting packages can create credit notes in their systems. If unsure how to issue them, look at the help documents.
Some popular accounting packages include FreshBooks, QuickBooks, Xero and a free version of Pandle, including online invoicing.
Once the document is created, leave it until payment is received or allocate it against the invoice. Allocating it against the invoice will reduce the amount of the invoice.
If you use a manual system, then our free template in Excel is suitable. The template is available for download at the bottom of this page.
What Information Should I Include on a Credit Note?
The layout of a credit note is very similar to an invoice, and you should include as much information as possible.
Here is a list to include on a credit note:
- The word Credit note
- Your business information
- The customer information
- Unique credit note number
- Date
- The original invoice number
- Description
- Quantity
- Amounts
- Any discounts
- VAT (if registered)
- The total amount of the credit note
- Reason for the credit
Credit Note Example
Below are two examples created using our template. The first sample is to cancel an invoice in full for the return of goods.
The second is for services of 50.00 as the customer was not happy with the work carried out; this is a partial credit.
Credit Note Template
Our free credit note template is designed in Excel and is free to download using the link at the end of the page.
Follow the instructions below to create your own completed form to email or post to your customer:
- Open the document and create a template by adding your business logo and details.
- Save this as a template to use again.
- Once you have created the template, enter the rest of the details, including as much information as possible. It is always good practice to reference the original invoice number and includes the reason for issuing the document.
- Save the credit memo using the document reference number.
Credit Note Accounting Entry
If you use a double-entry accounting system, the double entries will post automatically to the accounts after saving the document. The entries are Debit sales and credit accounts receivables. It will reduce the sales figure and increase the accounts receivable.
A Credit Note for an Unpaid Invoice
If you have an outstanding invoice and know that the customer will not pay it, a credit memo can be issued to clear the account. Before you issue it, ensure that you have gone down every route to try and receive payment. The invoice can also be written off as a bad debt.
Would you please read our guide on debt collection to find the best ways to contact your customer?
Licence Agreement
By downloading our free templates, you agree to our licence agreement, allowing you to use the templates for your own personal or business use only. You may not share, distribute, or resell the templates to anyone else in any way.
Credit Note Conclusion
Credit note meaning – A credit note is a negative invoice issued to a company for various reasons including a mistake, overcharged or purchases returned.
A business will usually issue a credit note using accounting software or an Excel Template.
Other Useful Templates
At Business Accounting Basics, we have helped lots of small businesses by providing free Excel bookkeeping templates. Here are some of out templates that you may find useful:
