Credit note – Meaning and how it works

Feb 26th, 2021

The business world is practically sustained by transactions from two ends, which are the customer and merchant. Therefore, these two sides need to communicate, reaching out to each other for a transaction to succeed. More so, one of the means through which they communicate messages is a credit note. A credit note stands in place as a notification from the seller to the buyer under certain circumstances, which are discussed in the latter part of this article.

credit-note

What is a credit note?

A credit note is simply a document sent to a customer by a supplier, to notify them that they have been credited with a specific amount. However, although they could be other reasons, this is mostly due to an error that exists in the original invoice. Basically, it tells the customer that credit is being granted or applied to them for certain reasons. Also, a credit note is known as a credit memo, which is a short form of credit memorandum.

Normally, the credit note carries different information including the products it affects, their quantities and prices previously agreed. Also, it references the applicable invoice and states the reason for the credit note in such a way that the customer easily understands it. Ultimately, a credit note could mean the customer getting a refund in cash, or simply applying the deduction to future purchases. The choice could lay on the customer’s part or that of the supplier, depending on the deal they have in place.

When is a credit note used?

We use credit notes in the following situations:

  1. When the customer returns a good or rejected service for some reasons
  2. Receiving goods that may have been damaged beforehand, mostly during transit.
  3. Error existing in the price listing on the original goods invoice
  4. A customer overpays on the original invoice.

What is included on a credit note?

Normally, the supplier is the one who draws up a credit note and he or she decides the details it contains. However, there are standards to adhere to asides including the basic details of products, quantities and service prices. For proper record purposes, it is best to include the following:

  1. The date that the credit note was issued
  2. Contact details; company name, VAT number, billing or shipping address, and other information as you deem fit.
  3. The credit note number ensures it is easily traceable in your system. Also, you should link this number to the invoice number for easier pairing and tracking.
  4. Payment terms stating the preferred mode of payment as a deduction on future orders or a cash refund
  5. Also, note that if the original invoice already included VAT, then you would have to issue a reciprocal VAT credit note. This should contain the details of the invoice, as well as the amount it cost before VAT. In addition, it is important that you clearly state at the top of the note that the document issued is a credit not and not an invoice. This is because they may be similar in appearance and could cause potential misunderstanding between the two parties.

 

Conclusion

A credit note makes it easy to track and revise errors that breach the agreement in an invoice. However, when issuing, it is important that you do it the right way. With all the proper details included to avoid confusion.

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