What is a Credit Note? What To Know About This Commercial Document

Modern businesses use dozens of different commercial documents in order to maintain adequate records and to keep track of daily expenses and income. However, sometimes customers return items or invoices must be adjusted due to changes in contracts or shifting sentiments. In these cases, it’s illegal to just throw out an invoice and replace it with a new one, regardless of whether the new invoice is more accurate than the old one. Instead, you’ll need to use a credit note to make modifications to an existing invoice, as well as to serve as a record for a number of other changes that occur when funds are replaced, refunded, or adjusted. Let’s break down credit notes in more detail so you know when and how to use them for your business.

What is a Credit Note?

A credit note (also called a credit memo or credit memorandum) is a kind of official legal document you can use to notify customers about a credit issue or a problem with a previously distributed invoice. Think of a credit note as an adjustment to an existing invoice, transaction, or line of credit. You make the note when you need to alter something about a transaction that happened previously due to new information or due to a mistake on either your end or the customer’s. Business owners will often use credit notes in order to correct discrepancies between their records and invoices , to make corrections for personal mistakes, and more. Most commonly, business owners utilize credit notes to change invoices without actually deleting or erasing the invoice in question, as doing so is often illegal.

When to Use Credit Notes

You can use credit notes for a variety of situations. Here are some examples:

• If a customer returns goods or rejects your services for one or more reasons, you’ll likely have to return payment. Thus, you’ll need to issue a credit note to change the profits or invoice for your business.
• If an invoice had a mistake (such as overpayment or underpayment), you’ll need to issue a credit note to change the invoice to the correct values. This is particularly important because it’s illegal in the United States (as well as the UK, Australia, and New Zealand) to delete any invoices since they make up a major part of a business's paper trail. Deleting invoices can sometimes lead to invoice fraud .
• If goods were damaged during transit, you can also use a credit note to change the invoice or to add some information for future review.
• If a customer needs to pay an overdue invoice and additional charges are levied as a result.

Basically, credit notes are useful tools you can leverage to make sure that you keep accurate records and to inform clients or customers about changes to invoices. In any case where you might need to change an invoice and reissue it to a client or just for storing with your own records, a credit note is the way to go. However, credit notes can also be used separately – you can make stacks of credit notes to be utilized for future invoice mistakes provided you anticipate a certain kind of mistake or predict future issues well.

How To Issue Credit Notes

Since credit notes are so useful for businesses that issue invoices or who take pains to keep extensive track of their records and expenses, it’s fortunate that issuing credit notes is usually quick and simple. Most invoicing and accounting software, including Xero and some versions of QuickBooks , provide credit note functions that allow you to create credit note templates or fill in blank templates for whatever you need. Standard credit notes show a negative balance for an invoice that you alter or “remove”. For instance, if you invoice a customer for $100, only to need to cancel the invoice later, you can issue a corresponding credit note for a “negative” value of $100. When placed into your accounting software, these credit notes can balance the books and make it so that there aren’t any profit or expense discrepancies. This may be especially important if your business is ever audited by an outside organization or a CPA.

Important Information to Include on a Credit Note

A given credit note template should have multiple attributes or sections containing:

• A list of any products, quantities, or services that were agreed upon with the original invoice
• A list of any changes made
• A section for any detailed notes, should they be necessary
• A statement for the reason for the credit note
• Contact details
• A credit note number
• A customer reference number
• The date of the credit note issuing

If your credit note is intended to act as a “credit refund” for a customer (for instance, if they return an item and your policy is to refund them with store credit), you can also note this on your credit note form.

Are Credit Notes the Same as Debit Notes?

Since credit notes are pretty simple instruments, lots of people occasionally confuse them with debit notes. However, debit notes are distinct instruments and are instead issued from a customer or client to your business. Debit notes are used to request that you return any funds that were already paid. For instance, if a client receives defective products or services from a company, they can send a debit note to the company they paid and request what essentially amounts to a refund. Think of a debit note as a formal request for a refund, or a formal request for a seller to issue a credit note to a buyer. Since both note types are used for different things, they are not interchangeable. However, you may occasionally utilize both credit and debit notes in conjunction with one another. For example, a client may request a refund due to a defective product being shipped to their location. They will issue a debit note to the company they purchased the product from in the first place. The company, in response, will then issue a credit note both for their own records and to the client who they shipped the product to in the first place. The credit note may also include details about refunds (such as whether it will be refunded in cash or in business/store credit).

Do You Always Need To Issue Credit Notes for Refunds?

Not always, but it’s a good idea. If you run a traditional storefront and observe hundreds of transactions per day, your transaction software may automatically add credit notes to invoices or to transaction records at the end of a given business day. It’s always a good idea to issue credit notes whenever there may be a discrepancy between profits and expenses and refunds. If nothing else, credit notes can help your accounting process remain streamlined and accurate throughout the business year. More importantly, credit notes are important for covering your business in the event of an audit or an investigation by a CPA. Credit notes can help explain any discrepancies in your records and show that you do business correctly and legitimately.

Do You Need Credit Notes To Issue Refunds?

No. Again, credit notes are just descriptions of the discrepancy and any steps you took to correct the issue between your original invoice and any necessary modifications. Credit notes do not serve as credit or refunds in and of themselves. This means that a customer cannot bring a credit note to you and claim that it serves as credit for your organization or business. They must have legitimate credit from whatever other crediting method you use (i.e. store points, special value on a store card, etc.) in order to take advantage of any refunded money you provided. Furthermore, credit notes are not required to give out cash refunds. However, credit notes are particularly important in these cases since they serve as the only explanations for why the cash in the register is different at the end of the day than it was when you recorded an original transaction.

Summary

As you can see, credit notes are incredibly useful tools that business owners can use to keep track of their invoices and any changes that they might make to the values on those invoices throughout a quarter. Credit notes are important since they can help you keep accurate records and protect your business in the event of an IRS or other audit. However, it’s important to create credit forms correctly and make sure that they contain all the necessary information so they serve as legitimate notes if you ever need to review them. Be sure to use excellent software that has pre-made credit note formats so you can create credit notes on the fly or whenever it’s necessary. Looking for more business resources? Check out Seek Capital’s blog for more helpful business best practices and info ! Sources https://www.investopedia.com/terms/d/debit-note.asp https://www.legalmatch.com/law-library/article/invoice-fraud-attorneys.html https://quickbooks.intuit.com/learn-support/en-us/customer-refunds-and-credits/enter-and-apply-credit-memos-and-delayed-credits-in-quickbooks/00/186120