What is a credit note and when should you issue them?

If a mistake is made during your invoicing process, credit notes can be a quick and easy resolution. These are designed to credit money back to customers when needed or to rectify incorrect invoices. Read on for when you should issue credit notes, and to find out what information should be included

Author: Euan Aitken | Published: 12/08/2022

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What is a credit note and when should you issue them?

Credit notes are an integral part of the invoicing process within business. However, they are not used in the same way as a regular invoice. A credit note is used as a negative invoice, and is a way to put into writing that the customer is due a partial or full refund for the services or products provided. A credit note can be used to show a cancelled invoice, or it could be less depending on whether or not a full refund is required. This only applies to invoices that are already processed, when payment from the customer has already been taken. It is a way to reverse the payment process whilst still accounting for all transaction records on the company books.

Doing this allows your business to cancel all or parts of an invoice that have already been issued. This is essential because invoices cannot be edited or deleted once issued by law since most audit trails within finance are legally mandated. These documents shouldn't be confused with debit notes as they are for different purposes. A debit note works by providing the buyer with a formal document that requests a credit note to be processed and typically comes before the fact.

Another similar process within this system are credit memos. These have a specific use, and are used in the event that the customer needs to make a change to an order when an invoice has already been issued. Credit memos are used particularly within e-commerce businesses, as sometimes sellers wish to issue store credit to customers as an act of goodwill. This is typically done when the original sales agreement didn't have an explicit refund policy but the seller allows an exchange for credit, which allows the consumer to exchange the purchased items for other items that the supplier has in stock.

Situations that warrant a credit note

  • There might be several instances in which, as a supplier, you should be able to offer the customer a credit note. These include:
  • The goods provided were damaged in transit (you issue a credit note in this case as you can open a claim with the courier company for the value of the damaged goods)
  • There was a mistake in price on the original invoice provided
  • There was an overpayment taken on the original invoice
  • Any other errors become about on the original invoice
  • The invoice was issued to the wrong customer
  • The customer ordered an item by mistake and wants to exchange the wrong item towards the payment of the correct one
  • You want to make a record that a customer's due payment on an invoice has been canceled

What should you include on a credit note?

  1. The words 'Credit Note' should be clear at the top of the document
  2. The customer's information
  3. Your business information
  4. The date issued
  5. A reference that shows the customer their credit note number
  6. The original reference to the initial invoice which the credit note is being issued for
  7. Description of credited items, quantities purchased and the prices paid for said items
  8. The total amount credited back to the customer

When completing this process, since money is being issued back to the customer, some businesses may require a signature to approve the document and authorise credit back to the buyer. Typically, customers don't like to wait long periods of time when it comes to resolving payment issues, so integrating some e-signature software into your business can significantly speed up the process of authorising payments. Zigaflow offers the e-forms module with both our business and service automation packages, so you can resolve credit note disputes quickly and effectively. Furthermore, the invoices module provided within the same packages has the power to drive your invoicing workflow, ultimately increasing efficiency when your business needs to create and approve credit notes. Ready to upgrade your business processes? Get in touch to book a demo with us today.

Euan Aitken

Euan Aitken

Sales & Marketing Director

Having started his journey with Zigaflow as a customer who took a keen interest in what the software could become, Euan joined us to lead our Sales & Marketing. Euan loves all things Business, Sales & Tech.

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