Credit Note Or Credit Memo

Credit Note Or Credit Memo – What Is It? When To Use It And View Sample Credit Notes

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 a 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 a Credit Note to give a credit of $90 to your customer for the amount over-billed. View Sample
  • 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. View Sample
  • 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. View Sample
  • 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. View Sample
  • 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. View Sample
  • 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. View Sample

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 Section)

  • 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 Note” .
  • 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 for.
  • Your customer or client name and address.

2. Credit Note Body (Middle Section)

  • 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 Section)

  • 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 cycle.

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 Instant Invoice or Ezy Invoice.

Download Invoice Software or Buy Now

Sample Credit Note

Below are some sample credit notes or credit memos  created with our invoice
software
Ezy Invoice.

Copyright © 2005 EzySoft Developments

http://www.ezysoft-dev.com

Feel free to link to this article from your website. You may also freely publish this article on your website or publication providing that the article is un-edited, the copyright information above is displayed and all links remain active.

This entry was posted in Business Documents. Bookmark the permalink.

19 Responses to Credit Note Or Credit Memo

  1. diabetes says:

    Thank you all!

  2. NASIR says:

    how to entry CREDIT NOTE in the final accounts?

    • GregoryS says:

      Nasir, you don’t normally use a credit note in the final accounts. You normally use it in your Accounts Receivables only. In the final accounts you would normally pass a journal entry. If unsure, its best to seek professional advise from your accountant.

      • mitch says:

        Jan 05 Selling 10 items on account @ $10 each, terms: 30 days with return policy within 7days.

        Accounts Receivable $100
        Sales $100

        Jan 09 Customer return 2 defective items, credit memo issued

        Sales $20
        Accounts Receivable $20

        Feb 04 Customer paid cash for remaining items in full

        Cash $80
        Accounts Receivable $80

  3. reyasat ali khan says:

    dear,
    thanks for giving such a nice example on
    the topic.
    thanks&regards,
    reyasat.

  4. Thanks for sharing the information with examples.

  5. James Anthony says:

    Any tips on debit memo or debit note?

    Thanks

  6. NIMROD says:

    Great idea well shared. examples with vivid and minute details. u eve really helped.

  7. ykann a manyang says:

    it’s nice and good to learn to know it .

  8. Roomis says:

    Great!

    Thanks

  9. ISHIKA says:

    THANK U SO MUCH.
    ITS TOO HELP FULL FOR ME

  10. Godfrey says:

    Thanks.This has fully enlightened my knowledge on credit note operations.

  11. p.himabindu says:

    Hi,

    The examples or description was very good

  12. rose says:

    thank you so much, was really helpful!

  13. This website really helped me do what i had to, i really learned alot! thanks!!!

  14. vimal says:

    Hi Guys,

    I need Proper definition of Credit Memo in Account Payable.
    Kindly Help me…

  15. Alex Ryan says:

    Very professional description, experience and expertise in invoice industry reflects in this article.

  16. karaline says:

    very great discription of this but all it needs is an example and it would be perfect……….bt this was helpful though….:)