What is a credit note?

Managing your finances is one of the most crucial aspects of any business, no matter the size. That means making meticulous records of all transactions, even negative ones. That’s where a credit note comes in.

Also known as a credit memo, a credit note is a formal notice given to a customer to indicate a debt. The opposite of an invoice, it’s essentially a means of letting the customer know they are in credit, and allows the merchant to make a formal record of an amount returned to a customer in the event of a damaged product or a cancelled product.

A credit note is required so the business and the customer can accurately balance their books, and can also be used to offset any future purchase or outstanding balance.

How does a credit note work?

A credit note is issued by the finance department following an invoice when a sale needs to be amended or cancelled. Businesses use a credit note to help keep their finances in order and balance their books. It acts as a legal document, letting a business amend an invoice without deleting or altering it, and keep a paper trail without changing the document history.

A credit note doesn’t necessarily need to follow a strict structure like an invoice, but there are several things it needs to include. A credit note should include the date it was issued, a number corresponding with its partner invoice, contact details of your business and the buyer, any payment terms and the reason the credit note has been issued. It should also clearly state that it is a credit note and not an invoice. For this reason, we always recommend differentiating your invoices from your credit notes.

As with an invoice, a credit note can be generated with invoicing software like Xero, and this can help you save a lot of time and resources, and automatically match it to its respective invoice and any payment reminders sent.

When to issue a credit note

There are two types of credit notes – incoming and outgoing, with the former being received by the business and the former being sent by the business. A credit note should be issued when:

• Invoicing mistakes have been made. This can be anything from an incorrect amount to a forgotten discount.

• A refund needs to be issued to a customer due to a defect that occurs within the warranty period.

• Goods must be returned to a supplier.

• Awaiting payments on an invoice need to be cancelled.

• There has been a change to the order which means the invoice amount must be increased.

• The client is owed money and there is a negative balance.

• An order must be amended after an invoice has already been created.

Once the credit note has been issued, the original invoice can be cancelled and an amended invoice can be sent. Note that a credit note must be stored by law for at least six years for auditing purposes.

Example of a credit note

Issuing a credit note is relatively straightforward. For example, you invoiced a customer for a product you sold for £10 and you accidentally charged them £12 on the initial invoice. You need to cancel the invoice and issue a credit note of -£2. This credit can then either be used towards a future purchase or issued to the customer as a refund.

How can GoCardless help?

Mistakes happen in any business, and being able to create and send credit notes with minimal hassle will save your finance team valuable time. GoCardless is a powerful online payment solution that helps to automate payment collection, significantly cutting down time spent collecting payments and making any alterations if payments are not taken correctly.

GoCardless can also be used alongside automated invoicing and accounting software to improve the reliability and efficiency of your financial workflow. Businesses that automate invoice payments can allocate resources more effectively and with fewer mistakes.