What is Credit Note? Meaning, Sample, Template

Adjustments to invoice amounts are very common, whether due to clerical errors, refunds, discount mismatches, damaged products, or any other reason. It's important to adjust the amount for the buyer, and a credit note is one of the best ways to do so, providing transparency, clarity, and efficient resolution for both parties. 

In this blog, we discuss everything you should know about credit notes, including their use cases, format, accounting implications, and recent e-invoicing compliance related to credit notes.

What is a Credit Note?

A credit note, also referred to as a credit memo, is a crucial financial document utilized in business transactions to indicate a reduction in the amount owed by a customer or owed to a supplier. It serves as a formal acknowledgement of a refund, credit, or adjustment made to a previous transaction due to various reasons such as invoice errors, damaged goods, order cancellations, or overpayments.

Credit notes are issued by businesses to their customers or received from suppliers, aiming to rectify errors or resolve disputes regarding invoices. Essentially, a credit notes functions as a commitment from the issuer to reimburse the specified amount to the recipient or adjust it in subsequent transactions.

Credit Note Use Case Example

Example 1: Incorrectly Charged Invoice

Company A, a clothing manufacturer, sends a shipment of 200 units of shirts to Retailer B. However, due to a data entry error, Retailer B's accounting department received an invoice for 250 units instead of the actual 200 units received. Upon reconciliation of their records, Retailer B discovers the discrepancy and notifies Company A. In this case, Company A needs to issue a credit note to Retailer B for the excess 50 units charged on the invoice.

Example 2: Product Return Due to Damage

Customer X purchases a laptop from Electronics Store Y. However, upon receiving the laptop, Customer X discovers that the screen is cracked. Dissatisfied with the product, Customer X contacts Electronics Store Y to initiate a return. Upon receiving the returned laptop and verifying the damage, Electronics Store Y needs to issue a credit note to Customer X for the original purchase amount, allowing Customer X to either receive a refund or use the credited amount towards a future purchase.

When is a Credit Note Issued?

Credit notes are commonly utilized in various scenarios to rectify billing errors and ensure financial accuracy:

1. Invoice Errors: If there's a mistake on an invoice, such as overcharging, undercharging, or incorrect item or quantity listed, a credit note is issued to rectify the error.
2. Product Returns: When customers return products due to defects, damages, or dissatisfaction, a credit note is issued to refund the purchase amount.
3. Cancelled Orders: A credit note can be issued to refund the customer if an order is cancelled before it's delivered.
4. Discount Corrections: If a discount was not properly applied to an invoice, a credit note is issued to adjust the invoice amount accordingly.
5. Advance Payments: If a customer makes an advance payment for goods or services but later decides not to proceed with the purchase, a credit note should be issued.
6. Warranty Claims: When products are returned within the warranty period due to defects or malfunctions, a credit note is issued to refund the customer or provide credit for future purchases.
7. Supplier Returns: If a business receives goods from a supplier that are damaged, defective, or not as ordered, a credit note can be requested to offset the payment or obtain a refund.
8. Payment Discrepancies: In case of discrepancies between the amount paid and the amount owed, a credit note can be issued to adjust the payment accordingly.

Details to be Mentioned in Credit Note

A credit note should contain all the general details of an invoice like buyer and seller details. Besides, here are some of the additional fields that need to be mentioned.

• Identification: the document should be clearly labelled as a credit note.
• Date of Issue: The date when the credit note is issued
• SST Number: If applicable, ensure it's included.
• Credit Note Number: Unique identifier corresponding to the invoice.
• Customer: To whom the credit note is being issued
• Purchase Order Reference/Invoice Number: Mention the invoice /PO number against which the credit note is issued. It helps to identify the transaction.
• Reason for Issuance: Clear explanation
• Item Details: Description, MICR Code, Quantity, Rate (MYR)
• Amount: Total Price excluding SST, SST Amount, which is being returned or refunded
• Payment Terms: Any conditions for credit use or refund.

Credit Note Format and Excel Template

Here is the editable credit note template in Excel for Malaysian businesses. 

Why issue a credit note instead of reissuing an invoice?

Issuing a credit note instead of reissuing an invoice serves several purposes and can be advantageous in certain situations:

1. Streamlining the Process: Issuing a credit note is often quicker and more efficient than reissuing an invoice.
2. Maintaining Document History: The original invoice remains intact by issuing a credit note, providing a complete record of the initial transaction. This is important for accounting and auditing purposes.
3. Transparency and Clarity: Using a credit note clearly indicates that an adjustment has been made to the original invoice and the reason for the adjustment. 
4. E-invoicing Compliance: In Malaysia, there are legal requirements for issuing credit notes for e-invoicing purposes.

Advantages of Using Credit Notes in Malaysia

Credit notes provide several key benefits for businesses operating in Malaysia, especially in the context of financial management and compliance:

• Error Correction: They enable businesses to rectify billing errors, such as overcharges or incorrect quantities, without altering the original invoice, ensuring accurate financial records.
• Transparency: Credit notes clearly document adjustments, specifying reasons like returns or discounts, which fosters trust and minimizes disputes between parties.
• Audit Trail: They preserve the original transaction history while documenting changes, making audits and compliance checks easier.
• Tax Compliance: Credit notes help businesses adjust tax liabilities accurately, ensuring taxes are paid only on corrected amounts and avoiding discrepancies with tax authorities.
• Operational Efficiency: Issuing credit notes is faster and more streamlined than reissuing invoices, reducing administrative burdens and saving time.
• Customer Satisfaction: They demonstrate responsibility in addressing issues, enhancing customer trust and fostering long-term relationships.

Conclusion

The evolution of credit notes from paper documents or non-standardized electronic formats to validated electronic documents within Malaysia's e-invoicing system offers numerous benefits for businesses and tax authorities alike. For businesses, electronic credit notes streamline the adjustment process, reduce manual errors, facilitate better record-keeping, and enhance compliance management. For tax authorities, the validation of credit notes through MyInvois improves visibility into transaction adjustments, reduces tax discrepancies, and supports more effective tax administration. 

As this system continues to develop, further refinements in processes, integration capabilities, and compliance requirements are likely, making it essential for businesses to stay informed and adapt their practices accordingly.

Also Read

e-Invoicing in Malaysia

e-Invoicing FAQs in Malaysia

Transaction Types of e-Invoicing in Malaysia

e-Invoice Model in Malaysia

Important Terms in Malaysia e-Invoicing

e-Invoice Exemptions in Malaysia

Reasons for Rejection and Cancellation of e-Invoice in Malaysia

e-Invoice Malaysia Penalties

Self-Billed e-Invoice in Malaysia