Last editedApr 20222 min read
The invoicing process is often straightforward. A customer makes a purchase, your business issues an invoice, and the customer makes a payment. But what happens when the customer makes a return? You’ll need to take note of the refund, often using an invoice with a credit note. We’ll cover the credit invoice definition and examples of how it’s used in this guide, helping you reconcile errors and issue refunds.
What is a credit invoice in accounting?
Sometimes called a credit note or credit memo, a credit invoice refers to the notation detailing money credited back to the original invoice. A customer refund is the most common example of the credit invoice definition, but there are numerous circumstances where this notation can apply.
Rather than deleting the original invoice from your records, credit invoices let you update your customer account and alter accounts receivables as needed. So, what is a credit invoice in accounting? It’s the new document issued as an amendment to the original invoice. It’s useful for both buyers and sellers because it keeps the records accurate.
What is a credit invoice used for?
There’s a multitude of reasons why you might need to change your original invoice to reflect a credit to the client’s account. When looking at what a credit invoice is used for, you’re likely to come across everyday reasons like the following:
Promotions and discounts – The seller wants to reward the customer for their loyalty by giving them a discount. This can be applied to their account via an invoice with a credit note.
Customer returns – The customer returns products that they’ve already paid for. In return, the seller issues a credit memo to correct the original amount stated on the invoice.
Invoice dispute – The customer feels they were incorrectly charged for the original items, and the seller comes to an agreement to reduce the price. The credit invoice is issued to reflect this reduction in pricing.
Invoice error – Either the customer or seller notices errors in the original invoice after it’s already been paid and closed. The seller can issue a refund to correct the error using a credit memo, and the customer corrects the error in their accounts with a credit invoice received.
Customer prepayment – Companies that deal with regular customers might have an arrangement where customers can make payments on account. This means they want to use the prepaid account to cover their bill. In this case, the business can issue a credit invoice to serve as a receipt.
What are the benefits of using a credit invoice?
There are numerous benefits to credit notes. Amending the original invoice with a credit note prevents errors, particularly when compared to removing the original invoice completely. This could cause confusion when the time comes to balance the books or filing taxes. For clarity’s sake, a credit note provides an easy reference point for all parties involved. This also keeps customer accounts up to date and offers a way to handle prepayments with a clear paper trail.
How to create a credit invoice
If you need to create an invoice with a credit note, you’ll simply follow the same structure that you would for any other invoice. Invoicing software will give you a credit invoice template to fill in, with spaces to reflect the credit given back to the customer’s account. You can then link the credit invoice to the original invoice by reference number, to keep them reconciled in the system.
In terms of accounting, an invoice with credit note will be recorded under your revenue and accounts receivable accounts. As payment is received, you’ll adjust these entries accordingly. Dealing with credit invoices offers a straightforward way to account for refunds, errors, and payment disputes in your system. By using automated invoice software, you’ll make it easier to balance the books.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.