Credit Note Or Credit Memo - What Is It? When To Use It And Sample Credit
What is the Credit Note for and when to use it ?
A Credit Note or Credit Memo is a document used to adjust or rectify errors
made in a sales invoice which has already been processed and sent to
customer. If you have already sent an invoice to a customer but now need to
provide a credit for that invoice, you would send them a Credit Note or Credit
Memo. You can think of a credit note as a "negative invoice."
Some examples of when you would use a Credit Note
- Unit price overcharged or over-billed : For example you
issued an invoice for an item for $1100 when the correct price of the item
should have been $1010 instead. Therefore you need to issue
Credit Note to give a credit of $90 to your customer for the amount over-billed.
- Goods short shipped : You invoiced a customer for 10
units of your product but only shipped 9 units to them by mistake. The
customer then calls you to say that 9 units are okay and does not want the
shortfall item at the moment. Therefore you need to issue a Credit Note to
credit your customer for the shortfall quantity of 1 unit.
- Faulty goods returned or goods rejected
by customer. You would issue a credit note for the goods returned to correct
your Accounts Receivable and Inventory.
- Product Wrongly Shipped : You wrongly invoiced and
shipped Product A when the customer actually ordered Product B which may or
may not be at a different price. To rectify this, you would then ship Product B together with a Credit Note
for Product A and another invoice for product B.
This will restore the inventory and Accounts Receivable in your books while billing the
customer for the correct item and amount. Meanwhile the customer returns the
incorrect Product A.
- Discounts given after the invoice is issued: You sent an
invoice for $1100. The customer then calls you asking for a discount and ask
you to waive the $100 making the net invoice amount $1000. You agree to this
in good faith. You would then issue a credit note for $100 to this customer to
adjust for the discount given.
- To Write-off Customer Short Payments : You send an
invoice for say $2010. The customer sends you a short payment of $2000 only.
You do not wish to recover the shortfall amount but your books indicate that $10 is
still owing on this invoice. You can then issue a credit note of $10 to
write-off the shortfall amount.
How To Write A Credit Note And What To Include On It
Basically it is the reverse of the Sales Invoice. You can divide the Credit Note into 3
main parts : The Header, Body and Footer.
1. Credit Note Header (Top Part)
- Your letterhead : Your business name, address, telephone & e-mail and web
address if available. In some countries, you must also included your business
registration and Goods & Services Tax number .
- The words "Credit Note " clearly written towards the top of the page. If your
registered to bill and collect tax, you may also need to include your Tax
Registration number. This can usually be indicated just below the words "Credit
- A Credit Note Number. This a running serial number that you maintain. You should
only have one number per credit note issued. Hence, no 2 credit notes should
have the same number.
- Credit Note date.
- Your payment terms, normally you should follow the term given under the sales
invoices E.g. "COD", "Cash", "30 days" etc.
- Your customer's reference number if any.
- Your own reference no, e.g.. the sale invoice no. that this credit note is
- Your customer or client name and address.
2. Credit Note Body (Middle Part)
- A description of why this credit note is being issued. Start by indicating
which invoice number you are referring to. Then clearly indicate relevant information
like pricing error,
quantity or products type wrongly shipped. Show the correct
pricing, quantity and product type. Eventually, the net amount should be the credit
to be given to your customer to adjust the original invoice amount.
3. Credit Note Footer (Bottom)
- Total Amount of all individual items
- If applicable, a tax amount and total after tax.
- Other comments you may have. For example, to deduct this credit note in your next payment
Tools For Creating Credit Note
You can use any word processor or spreadsheet software program to create a
credit note. However these programs have limitations in that you cannot easily
adjust inventory, deduct sales value or track whether a credit note has been net
off from receivable account. Also searching for a credit note means searching
files in your hard disk and opening them one at a time. You can overcome these
limitations by using a designated invoicing or billing software which has
inbuilt Credit Note features such as InstantInvoice 3 or
Ezy Invoice 3000.
Sample Credit Note
Below are some sample credit notes or credit memos created with our
Ezy Invoice 3000.
Copyright © 2005 EzySoft Developments
(Published : 25/Nov/2005)
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