Understanding What A Credit Note Means In Accounting, How It Should Be Prepared And Accounted For

Understanding What A Credit Note Means In Accounting, How It Should Be Prepared And Accounted For

Priyanka Tiku Tripathi
Priyanka Tiku Tripathi
Table of Contents
Table of Contents

Maintaining proper accounts is critical for all businesses. You can generate valuable information from accounts that helps in running the company more efficiently. Different instruments are assigned for various accounting procedures. This helps to understand and access them in detail.

We will elaborate on the following topics in this article:

  • What is a credit note?
  • Reasons for issuing a credit note
  • How do you issue credit memos?
  • What information should a credit memo include?
  • Including the credit in your books
  • Knowing more about the credit memos from banks
  • What is a debit note?

Let’s get started!

What is a Credit Note?

A credit note is sent to the buyer when there is a reduction in the amount payable to the seller. By this instrument, the seller promises to pay back the reduced amount or adjust it in a subsequent transaction. When the seller issues a credit memo, the buyer will also issue an instrument called the debit note. You can easily create a debit memo or a credit memo using an accounting software like Deskera. Know more about accounting software here.

Reasons For Issuing A Credit Note

There may be different reasons for issuing a credit note, depending upon the type of business and their dealings. Here are some common ones:

  • A credit note is furnished by the supplier when the goods supplied are damaged or when a wrong item is delivered to the buyer.
  • When a seller charges more than the actual price of the goods or services being rendered, he/she issues a memo to reverse the extra sum, which is known as a credit note.
  • The instrument is also issued when the available discount has not been applied at the time of preparation of the invoice.
  • Credit notes are also sent to the buyers when the seller wants to cancel a payment pending from the buyer.
Source: Invoiceberry| Sample template for a credit note

How Do You Issue Credit Memos?

Now that we know what a credit note is, it is essential to understand how it is prepared. If you use accounting software, then it is easy to prepare credit memos. There are various accounting software packages available online. The key is to apprehend which one is most suitable for your business, and you can check that here. Suppose you cancel an invoice or accept a product-return from the buyer. In that case, you must raise a credit note for the transaction’s total value.

For instance, if you have raised an invoice for $100 and want to issue a credit note for the full amount, the note will reflect an amount of $100. Let’s say, you are adjusting 50% of the value of the product due to damage or other reasons, then your credit note will show an amount of $50. Also, the serial number of the invoices must be maintained for every note that is being issued. A credit note can be prepared using various formats and templates, some of which you can get from Deskera. Here are some sample templates from Deskera:

Picture source: Deskera|Template for credit memo from Deskera

What Information Should A Credit Memo Include?

Now that we have covered the credit note definition and how it should be issued, let’s focus on what information should be included in this document.

As with other business instruments, you must mention your business’ contact details on the credit invoice. It must also contain the full information of the customer to whom you issue it. The original invoice number, date, and the products or services must also be mentioned.

A new credit memo must also include the reason for giving credit to the customer. It should have a unique serial number, date, and the credit amount you are offering. If there are any new payment terms, you can specify that too within the document.

Including The Credit In Your Books

Having obtained a fair idea about what is a credit memo, the next aim should be to know how you can incorporate this in your bookkeeping. How you enter the credit will depend on whether you are issuing the credit invoice after you receive payment for the goods or before that.

However, you must first have your double-entry bookkeeping well organized to ensure proper credit entries in your books. This guide will be very useful to know everything about the double-entry accounting method.

Knowing More About the Credit Memos From Banks

It is not that a company can only issue credit memos. It can also receive credit memos from banks when there is an increase in the former’s balance. The same will reflect in the company’s bank account statement. There can be many reasons for the bank to give credit to the company.

Companies maintain a current deposit account with the bank that accrues interest over the years. When this interest is credited to your business checking account, you receive a credit memo from the bank.

In some cases, the bank collects money on behalf of the company. This happens when documents (cheques or demand drafts) in your business name are routed through the bank, and the money is sent directly to the bank account. In such a case, you receive credit memos from the bank.

The banks collect charges for the services that they provide. Sometimes these charges are reversed. The reason can be because of excess charging or because the bank has decided to waive off some charges. In such scenarios, the bank will issue a credit memo to the company. Learn more about bank credit and debit memos here.

What Is A Debit Note?

Picture Source: Invoicing Template| What does a debit note look like

Now that you know what a credit memo is, let’s get you acquainted with what a debit memo is. Simply put, it is the opposite of the credit note, and the entries will be precisely contrary. This guide from Deskera will help you understand everything about debit notes.

When a debit note is issued to a customer, the company is sending a notice to the buyer to pay an additional amount. In accounting, the debit note is as important as the credit note. This instrument may be issued by a customer to a company if there is any amount owed by way of deficiency in service or failure to supply a product.

The critical fact here is that when the instruments are issued, they must be entered into the company’s account books very carefully. Deskera offers the right accounting solutions that help you run your business more efficiently.

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