A credit note is issued when an invoice needs to be amended. Amendments are normally necessary if a mistake has been made on an invoice, meaning the amount payable is reduced.
Example of Using a Credit Note
Eddie LTD sells boxes. A sales order is placed on 8 June for 30 boxes at £5 per unit. The order is delivered on 30 June and on the same day as delivery, an invoice is raised for the 30 boxes by accounting for a total of £150. The next day the customer calls Eddie LTD and advises that 28 boxes were delivered, not 30, therefore, a credit note is required to reduce the amount payable. The accounts team at Eddie LTD raises a credit note to cancel the cost of the 2 missing boxes, totalling £10.
What Does a Credit Note Look Like?
A credit note looks similar to an invoice but instead of being labelled ‘Invoice’ it says ‘credit note’ and excludes payment details.
Often credit note reference the invoice they are reducing or cancelling to help accounts teams to allocate the credit correctly on their ledgers.
Why Are Credit Notes Important In Accounting
Credit notes are obviously important to a customer because it reduces what they pay and corrects an error. But when it comes to accounting they also matter because they form one of the different types of source records that need to be summarised and recorded in the financial records. By omitting credit notes, turnover will not be recorded correctly ultimately meaning that the financial statements are incorrect. It’s also essential that they get included in customer sales ledgers so that the amount each one owes this business is accurate and they aren’t chased for money wrongly.