One particularly important part of the invoicing process revolves around credit notes. These are not always used and therefore misunderstood by many people. As you read through this article, your understanding will further develop, and you will be able to able to identify when you should use credit notes and exactly how to do so.
If the need to use them arises and you aren’t sure how to utilise them, you could be left in a difficult situation. Fear not, as we will provide you with all the information you need, as well as free credit note templates, examples, and more.
What is a credit note?
Credit notes come into play once a mistake in the invoicing process is made. Everyone makes errors from time to time, so don’t be too worried if you get something wrong every once in a while.
Credit notes are classed as legal documents, just the same as other types of invoices are. These give you the ability to cancel invoices that have already been issued, either in part or in full. This is what makes these such an essential part of any business owner’s hub of knowledge; you will need to be able to change things when you get something wrong.
Issuing credit notes allows you to delete the amount from an invoice, without deleting the invoice itself. This is key to proceedings, as fully deleting invoices can be unlawful in certain parts of the world, such as countries where it is a legal requirement for businesses to maintain reliable audit trails. These countries include the UK, US, New Zealand, and Australia.
When should I issue a credit note?
As previously mentioned, credit notes will normally be issued once an error has occurred in an already-issued invoice. These issues could arise from an incorrect amount being included on the invoice, or when a customer wishes to change their order. The short version of the story here is that if an invoice needs changing or re-issuing, a credit note is the way to go.
Credit notes will normally be linked to an existing invoice, though they can also be issued separately, where they can be used against another invoice in the future. Keep in mind that the original invoice should never be deleted, due to legal reasons. Hopefully it is becoming clearer that the credit note is an essential piece of equipment within your invoicing workflow.
How do you issue a credit note?
Now you should be fully aware of exactly when to use credit notes, but there is just one problem remaining: you don’t know how to issue them.
Firstly, if you are already using software to send electronic invoices, keep in mind that it may be able to issue credit notes for you with no trouble whatsoever.
Credit notes show the negative balance of an invoice, so if you originally invoiced a customer for £250 and you now wish to cancel the entire invoice, you will need to send a credit note for the negative value of -£250. If you accidentally overcharged your customer by 50% for some reason, you would utilise a partial credit note. You will send one with the negative sum of -£125, so that the correct outstanding balance can be properly identified.
When using a credit note, be sure that you are keeping the invoice number sequence intact. This will help you to maintain an organised bunch of records and make the situation as clear as it possibly can be.
What information is included on a credit note?
Here you will find that the format of a credit note is highly similar to that of an invoice. The main difference is that the structure is less strict.
Credit notes should contain all necessary information for admin and recording purposes, and that goes for both you and your customer.
Here are the main things to include:
- Credit note number
- Customer reference number
- The payment terms
- A reason for issuing the credit note
- Your contact details
- Date the credit note was issued
Furthermore, it may seem obvious, but you will need to make it clear that the document is indeed a credit note. Therefore, you should label it as such at the top of the documentation. This will help the recipient to avoid any potential confusion.
Another thing to consider is that if the original invoice included VAT, you would need to issue a matching VAT credit note, which reflects the details of the invoice, including the amount before VAT.
Difference between credit notes and debit notes?
If you are researching information on credit notes, you have likely also heard about debit notes. This is a document that can also occasionally feature during the invoicing process. Debit notes, or debit memos as they are sometimes called, are issued from customers to a business and request that funds are returned to them.
There are multiple reasons why a debit note might be issued. These include the customer receiving the wrong order, goods turning up damaged, or the customer wishing to cancel an order. A debit note essentially acts as a formal request from the buyer to the seller, asking them to issue a credit note.
Difference between a credit note and an invoice?
Both credit notes and invoices are legal documents that assist with the cash cycle in business accounting. Invoices are issued to customers to show that payment is outstanding and to what value, whereas credit notes are issued to cancel an invoice or to show that a refund has been issued, with the return of your customers money.
In accounting, invoices are shown as a credit e.g: a positive amount coming into your business, while a credit note shown as a debit e.g: a negative outgoing amount of money. This has a clear balancing effect as there is a positive and negative transaction, this ensures that they both will cancel each other out.
Mistakes can happen, try not to dwell on them
Regardless of what industry you work in, or what type of business you run, mistakes will occur from time to time. This is a natural part of business ownership ad nothing to be ashamed about. Creating credit notes and issuing them will put your financial issues at ease and keep your customer relationships high, so utilise them as required.
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