30. Apr 2019 |

What is Credit Note and How to Use It

Once in a while, you’ve taken part in the invoicing process, and we bet you’re familiar with credit. To add, we’re going to guide you through the whole credit note process and all that is involved in getting you well informed. It’s possible that at some point you’ve come across a credit note either through issuing or on the receiving end. The challenge comes in when you ought to know how and when and how to issue one.

  1. What is a credit note?
  2. When is it required?
  3. Contents of a Credit Note
  4. Submitting Credit Notes
  5. Managing Credit Notes
  6. Credit Memo, Debit and Credit Note
credit note
A credit note is a structured means of refunding or returning invoices that have already been paid for or issued. (© pexels.com)

Credit notes and invoices are usually connected all to give room for the canceling of sales, either complete or partial. In some countries, you’ll find existing strict rules that govern the invoice processing, and for this reason, a credit note becomes of much importance when it comes to deleting the invoices. To mention, the whole sales process involves several documents, ranging from invoices to quotations, reminders, and notes of delivery and now the credit notes.

What is a credit note?

This is a structured means of refunding or returning invoices that have already been paid for or issued. This can either be part of the total amount of the invoice, whichever the case; a credit note is there to ensure that is done. Credit notes are essential simply because one is not able to delete once issued.

When is a Credit Note Required?

As earlier mentioned, a credit note is applicable in cases where one is required to cancel an invoice. Due to the strict restrictions by many government policies, this will provide a legally acceptable way to store the sales record for that specific account while at the same time boldly highlighting the canceled order and the specific amount of funds that was canceled.

Credit notes can also be issued in instances where there is a change of order whereby the invoice ought to be reissued or edited for accountability. This mostly occurs whenever there is an error on the invoice, or there’s a mistake in the order. For special circumstances whereby the client wishes to make changes to their order as in the case where of reducing or increasing the quantity of a product, or minus some products altogether, this would affect the total invoice. Any changes to the invoice will mean that one is required to re-issue the invoice reason being, an invoice that has been completed cannot be deleted and that a credit note should serve the role of canceling out the expenses from your budget.

Contents of a Credit Note

Just like quotations and invoices, credit notes also have some general principles on what should be captured. There’s some format that invoices ought to follow for them to stay within the legal requirements. However, quotations are less strict with their governing rules of information.

VAT is included in some of the credit notes. Therefore, they have some requirements on what ought to be captured in the form. Ideally, a VAT credit note should capture the data of the VAT invoice – to be specific, it should contain details on why the VAT credit note is being issued, the total credited amount, the previous amount before the value-added tax was in effect and not forgetting the invoice number of the original invoice with the set dates.

Invoices and credit notes are directly linked to each other. Nevertheless, special situations arise whereby one is expected to issue a stand-alone credit note which can be later applied to an invoice or maybe a different source of income.

Submitting Credit Notes

The compilation process doesn’t have to be that troubling for you. There are software to help you with the whole process and save you the struggle. The accounting software Billomat comes with an already established template with gaps for you to fill and generate a working credit note directly from an already existing invoice. It’s an automated process that directly links information in the credit note to that of the invoice and goes ahead to transfer data from the original invoice to the new credit note template. Editing can be done, should there be a need – for instance, cases where you file a partial credit note, and you can adjust a few lines and amounts. After all, this is done, a unique number will be given to credit note in the invoicing sequence. This will help with the effective management of records minus the blanks in your invoicing numbers.

Managing Credit Notes

This process is relatively straightforward. The handling of credit notes in the bookkeeping process depends on the point the credit note is being issued. For instance, those issued before invoicing is done are debited with a specified amount under “Revenue” and credited under “Accounts Receivable” for the specific client. For those using the online invoicing software Billomat, there’s a built-in book-keeping records that links the whole process and makes work easier.

Credit Memo, Debit and Credit Note

A credit note can also be referred to as a credit memo. However, there’s much difference between the former and the latter.

What are the Main Differences?

Credit and debit notes are both articulated forms, but the credit note focuses on the sales return to inform the client of the return purchase being accepted while debit note highlights the reason behind the purchase returns to the seller.

  • Debit note uses blue ink while credit note uses red ink.
  • A credit note uses a sales returns book while debit note uses a purchase returns book.
  • Debit notes are used only in cases of credit purchase while credit notes are used in cases of credit sale.
  • Debit notes are issued by the purchaser while credit notes by the seller.

The refund process can be quite a headache. Luckily for you, credit notes are straightforward and contain the correct data regarding your invoice. Even better an online invoicing software like Billomat with an in-built book-keeping can make the experience even much better, time-saving and minimizes errors.

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