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, in

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.

Benefits of Credit note

Now that you understand what a credit note is and its usage let's understand its benefits.

• Maintaining goodwill: Resolving issues through a credit note showcases your commitment to customer satisfaction and strengthens your reputation in the market.
• Correcting errors: Credit note is a great tool to rectify mistakes. Whether it's an overcharge or any other billing error, it helps in maintaining accurate financial records.
• Tax compliance: By maintaining accurate and transparent financial records, credit note helps you adjust your tax liability, thus ensuring you only pay tax on the actual amount received.
• Financial control: Credit note helps you account for discounts, returned goods, and any other adjustments, allowing you to balance your books and giving you complete financial control over your business.

Conclusion

Credit notes are an important tool in the world of business, finance and accounting. By understanding how to use them effectively, you can keep your financial records transparent, accurate and your business running smoothly.

As you navigate through business finance, remember that credit notes are here to help you maintain control over your business and customer goodwill.