What is a credit note?

Invoicing is an important part of any service-based business. Not only does an invoice provide a useful record of payment transactions, but it also lets you know what services were rendered in a clear and concise way. But what happens when you need to make changes after an invoice has already been drawn up? One common accounting tip is to use a credit or debit note in these instances, instead of creating a brand new invoice with the necessary addendums.

What does the term “credit note” mean? 

If it weren’t for credit notes, invoice processors would be forced to create a brand new invoice every time there was an alteration that needed to be made. Instead of taking that path, most invoice processors prefer to add a credit note to the original invoice to note where a credit ought to have been applied. 

Debit note vs. credit note

Also known as a debit memo, a debit note lets a customer know about any current debt obligations on either the business’s or the client’s behalf. For example, if certain services are rendered before the invoice is drawn up, the business may include a debit note in the invoice to remind the client what additional payment is owed. Or, if a customer returns an item, a debit note may be issued to let them know how much has been refunded or credited to their account.

A debit note differs from a credit note in that it is a notation to make services already rendered or products returned by a customer. A credit note acts as an addendum to an invoice when a client requests additional goods or services, or if a client changes their mind about one particular service. 

Reasons why a credit note may be necessary

A credit note may be a necessary part of the invoicing process for many reasons. Here are some examples of when one might issue credit notes:

  • A damaged shipment: If a shipment arrives with partially damaged goods, then a credit note may be issued for the damaged materials, whereas the client is still expected to pay full price for the undamaged goods. 
  • A customer was overcharged:Automated invoicing has taken over much of the accounting industry which reduces many of the human errors that used to creep into the system routinely. That said, there are still situations when customers may get overcharged as a result of some type of accounting inaccuracy. A credit note may be applied to remedy this issue with either a refund or chargeback.
  • A shipment arrived late and reimbursement was agreed to: If part of an agreement hinges on goods or services being delivered on a specific date, then a credit note may be applied if that date was missed as a form of reconciliation between the merchant and the customer.
  • A customer changes their mind about services: When an invoice is issued for multiple products or services at once, the customer may change their mind about one or two of those items, but still require the rest. In those instances, a credit note can be added to the invoice instead of creating a brand new one.

How to create a credit note

Creating a credit note is similar to making an original invoice, the key difference being that you want to ensure you reference the original invoice in the credit note. Some important information to mention in the credit note includes: 

  • Customer’s information
  • The date issued
  • The credit note number
  • The original invoice number
  • The total amount credited
  • Your company’s contact information (name, address, VAT number/EIN)

How to process a credit note

Processing a credit note depends on the situation and the customer’s preference. For example, if the credit note is for a particular product that the customer decided they no longer wish to purchase, then the credit note could be used to offset the cost of future payments.  If the customer chooses, they could request to have the cash amount returned to them instead. No matter what the customer chooses, the business should update its books accordingly to ensure they have an accurate record of the transaction.

Why you should use Mollie for your accounting needs

Whether you’re issuing invoices or adding new payment options to your website, Mollie is the simple solution for accounting integration.  We help businesses integrate an effortless payment experience for their online customers. Learn more today when you reach out to our team.

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