Glossary
What is a credit note?
The right way to fix an invoice that has already gone out: a new document that reduces it, rather than an edit.
Updated
In short
A credit note is a document a seller issues to reduce an earlier invoice, for returns or overcharged price or tax. In SimpleERP a credit note links to the invoice, can return stock, and is applied to invoices or refunded.
A credit note is a document a seller issues to reduce the value of an earlier invoice, for example when goods are returned or the price or tax charged was too high. In VAT and GST systems it refers to the original invoice and reduces the seller's output tax for the period it is reported in. It is the correct way to correct an invoice that has been issued, rather than editing or deleting it.
Credit note: a worked example
Riverside Stores returns 2 office chairs billed at $645 each. Harbour Steel Furniture, a fictional furniture maker trading in US dollars, issues a credit note against the original invoice, with tax at 20%:
| Account | Debit | Credit |
|---|---|---|
| Sales returns | $1,290 | |
| Output tax 20% | $258 | |
| Accounts receivable: Riverside Stores | $1,548 |
The 2 chairs go back into stock at their average cost of $420 each, so inventory rises by $840 and cost of goods sold falls by the same amount. Riverside Stores now owes $1,548 less.
Is there a time limit for a credit note?
Often, yes. Many tax systems set a deadline for reducing output tax through a credit note, counted from the original invoice or from the end of the tax year, so check your country's rule with your accountant.
In India, the GST deadline and format are covered in credit and debit notes under GST (India).
FAQ
Questions, answered
Can I just edit the invoice instead of issuing a credit note?
Not once it has been issued and reported. The customer may already have reclaimed the tax on it. A credit note keeps both records honest: the original invoice stays as issued and the reduction is a separate, dated document that both sides can report.
What must a credit note show?
Your name, address and tax number, a serial number and date, the customer's details and tax number if registered, the original invoice number and date, the value and the tax rate and amount being reduced, and the reason. Your country may add its own fields.
Does a credit note always return stock?
No. A return of goods brings stock back. A credit note for a price correction or a discount agreed after the sale reduces the amount owed without any stock moving. Choose which applies when you raise it.
Can I refund a credit note in cash?
Yes. If the customer has no open invoice to apply it to, refund it from cash or bank. The refund clears the credit balance on the customer's account, and the history shows the invoice, the credit note and the refund linked together.
Related
Keep reading
Debit note
A document that increases an invoice or records a purchase return.
Read moreAccounts receivable
Money customers owe for goods and services already invoiced.
Read moreTax invoice format
The fields a VAT, GST or sales tax invoice usually carries, how the tax lines are worked out, numbering rules, and a worked invoice to check yours against.
Read more
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