A Complete Guide to Credit Note in 2024

B2B pricing and billing, both are very complex, which results in frequent cases of billing errors. 

Mishappenings are bound to happen in business, such situations can only be reduced not eliminated, and when they happen, credit notes make it easy on finance teams. 

In this blog, we’ll be exploring every aspect of credit notes and how exactly it is different from debit notes. 

Let’s get into it.

TL;DR

• A credit note is a financial document that is a part of the purchasing process and signifies the amount the seller owes to the buyer in case of damaged goods, billing errors, or any missed discount. 

• A credit note is issued after an invoice is raised and is later adjusted to the same invoice or in a future invoice. Credit notes must include every information present in the invoice. 

• A credit note is different from a debit note. A debit note is issued by the customer for a particular amount with a specified reason for which he wants the credit note to be issued. 

What is a credit note?

A credit note, also known as a credit memo, is a document issued to a customer by a seller to notify them of a credit that is applied to their account. It is commonly issued due to order cancellation, damaged goods, or invoice error. 

A credit note is a pretty self-explanatory term: an official memo (note with details) containing the credit amount the seller owes to the buyer.

One thing worth noting about credit notes is that the credits received by credit notes do not necessarily have to be applied to the current invoice, the customer and supplier could agree to apply it to a future invoice instead.

When should the credit note be raised?

So, what sort of things can go wrong during the purchasing process? Well, lots of things. A few examples are:

• When goods are faulty or damaged
• Services are not up to standard
• The seller charged the wrong price on the invoice (avoid such scenarios with good billing software)
• A previously agreed discount was not applied to the invoice
• A discount was agreed upon after the invoice was sent
• The buyer accidentally overpaid and needs a credit or refund

A credit note could cover:

• The entire amount of an invoice
• Part of the total invoice amount
• The amount that does not relate to any particular invoice at all 

Recommended read: Should You Build or Buy Your Billing Software?

How does a credit note work?

A credit note works simply with the following steps:

Step 1: Supplier A sells goods to Buyer B and issues a tax invoice.

Step 2: Buyer B identifies quality issues with the goods received and decides to return the goods to Supplier A. Buyer B issues a debit note to Supplier A. 

Step 3: Supplier A acknowledges the situation.

Step 4: Supplier A prepares a credit note. This document acts as a formal acknowledgment by Supplier A that the goods have been returned and the corresponding credit needs to be issued to Buyer B. 

Details to include in credit notes are:

• Business contact details- Company name, address, contact information, and tax identification numbers.
• Customer information- Name, address, and any customer identification numbers or references.
• Original invoice details- Number, Date, and the specifics of the products or services.
• Reason for Issuing Credit
• Credit note details- unique serial number and the date of issuance for tracking and reference purposes.
• Exact credit amount
• Authorized signatory

Step 5: Both parties use the credit note to adjust their accounting records. For Buyer B, it reduces the amount payable to Supplier A, and for Supplier A, it reduces the amount receivable from Buyer B.

Zenskar takes care of your credit notes on behalf of your finance teams. 

In Zenskar, all you have to do is enter the credit note amount and reason. Once you enter these two details, all the other information will be automatically displayed on the invoice. The later process of verifying, sending, and tracking the status of credit notes is all automated. 

Credit note example

Imagine you are a supplier working in a B2B company. 

You have just received a credit note from one of your regular clients stating that they were overcharged on their last order due to discrepancies in the price of some items. 

The credit note will detail how much is owed back to them, against which invoice number, and why this adjustment has occurred. You acknowledge the credit note against your records and then refund or use it on the next purchase. 

This approach will not only help to close the issue quickly but also will keep a very transparent and professional link between both parties. These credit notes become the basis of accuracy in financial transactions and also build trust and show regard for fair business dealings as well. 

Credit note vs debit note

Both the credit note and the debit note are part of the purchasing process. 

Debit notes are either issued by the seller or the customer when one of the parties needs to make a debit entry into their accounts because something has gone wrong during the purchasing process.

When sellers need to remind their clients about the pending payments, the seller issues a debit note.  

Also, when a customer receives some goods/services that are not up to the standards and the customer wants to return goods or seek a refund, they issue a debit note. 

The customer will create a debit note (of the exact amount that he is asking for) and send it to the supplier. The supplier will then create a credit note in their accounting system and apply it to the invoice they're going to send to the customer. This will effectively reduce the total amount payable on the invoice so the customer only pays for the goods that are not faulty.

So, if $1,000 of goods were delivered but $200 were faulty, the customer would return the faulty goods with a $200 debit note. The supplier would create a $200 credit note, reducing the invoice to $800, reflecting the original $1,000 minus the $200 credit.

Debit notes can be issued in scenarios such as

• Undercharges
• Overcharges
• Refund

Also, if the debit note could not be applied to the current invoice due to any reason, the supplier could agree that the customer can pay for the fifty-dollar debit note separately or add it to a future invoice.

A good rule of thumb is to include similar information on your debit notes that you include on your invoices, such as business names, address and contact details, descriptions, quantities and prices of goods and services, and relevant tax amounts such as GST or VAT. The more information you include, the better your audit trail will be.

Why use debit/credit notes instead of deleting the invoices?

This is because businesses must maintain accurate transaction records. Deleting an invoice for faulty goods could leave no evidence of receipt during disputes. It's better to keep the original invoice, issue a debit note, and store both documents together for a complete audit trail of the transaction.

📌Here is a quick summary:

Components of a credit note

Here's a concise list of components that must be included in a credit note: (RW) (Source: Stripe)

• Name and address of the service provider (issuer)
• Name and address of the service recipient (customer)
• Tax number or VAT identification number of both parties
• Date of issuance of the credit note
• New sequential number unique to the credit note
• Description of the service or item (type, scope, time)
• Net, gross, and total amounts (positive values only)
• Tax rate applied and corresponding tax amount
• Optional: Special agreements on payment terms or other details
• Optional: Statement indicating retention requirement applies

Here is an example of the credit note template:

Benefits of the credit note

Credit notes are an integral part of the purchasing process and are significant for streamlining the accounting process. 

Exactly how?

• Credit notes help rectify errors where an overbilling, wrong pricing, or some other wrong charges for items are received by the buyer against the purchase has been made. 

In such scenarios, issuing a credit note will allow a business to represent that financial transaction correctly. It results in faster payment cycles and fosters a healthy cash flow. This is important considering 80% of businesses fail due to cash-flow mismanagement.

• A credit note increases client satisfaction. Whenever there are billing discrepancies or the goods delivered are faulty, issuing a credit note for resolving such discrepancies depicts responsiveness and care toward customers.

• Credit notes provide a clear audit trail of the exact amount of adjustments, and the reasons for issuing a credit note, providing accurate financial information, and transparency to the team. This documentation also helps in the decision-making process. 

Also,

Try Zenskar, the most flexible accounting software

Zenskar is a collaborative solution for all your billing and accounting needs. With Zenskar, every B2B finance leader can

• Handle pricing complexity
• Automate billing processes
• Reduce engineering dependency
• Accessible and easy to use by all the teams involved
• Iterate and evolve with pricing models and billing needs

Zenskar is the right billing system for your business as it requires no coding and offers rich integration with over 200 sources of data, which means you will be able to create every invoice quickly and accurately. 

Not to forget, all this process is done with the least manual effort as Zenskar automates everything.

Interested in giving Zenskar a try? Book a demo and we’ll show you how Zenskar can help you streamline your B2B accounting.

Frequently asked questions

1. What is a credit note in accounting?

A credit note in accounting refers to a document that the seller provides to the buyer, which reduces the amount of money the former owes to the latter. Such a note is used to correct an oversight, like overbilling, faulty goods, and discounts. It is essential to keep accurate financial records and show transparency regarding transactions.

2. What is credit note format?

A credit note format usually captures information such as the supplier's and buyer's names and addresses, a unique credit note number, the date of issue, reasons for issuing the credit, details of the original invoice, and the amount credited. It is structured in a manner that provides records for the adjustment of any transaction for auditing and reconciliation purposes.

3. What is a credit note used for?

A credit note is for correcting errors in billing, issuing refunds or providing discounts, and acknowledging returns of products or services. Such a document ensures that all financial transactions between entities remain correct, clear, and transparent. The seller raises a credit note to acknowledge and record such adjustment necessitated by discrepancies in the original invoice or dissatisfaction with goods and services delivered.

4. Is a credit note a refund?

No, a credit note is not a refund but a document showing acknowledgment of credit given to a customer. The credit note represents an amount that is due to the client because of returned goods or overpayment for invoices, thereby avoiding the need actually to refund money in such cases for proper accounting.

5. Why would you issue a credit note? 

You would use a credit note to correct errors in billing, return goods, or acknowledge other instances of customer credit requests. It creates goodwill and ease of accounting accuracy, yet most importantly, safeguards customer satisfaction—all three being very important in developing and nurturing longer-term business relationships.