Credit Note Against Invoice Refund: Here’s What You Need To Know About It!!!

Are you an avid shopper? Or have a retail business of your own? Then, you must know about credit note. In retail, it is a common term. You get shop credits when you return your defective griller and get a cheaper model instead or show that you were overcharged by the thingamajig by fault.

These are points you can use later while billing. In the US, adjustments to the invoice amounts are pretty standard. There are a million reasons why you can get a credit note here. It might be a data entry error at a clerical level, refunds, miscalculated discounts, or other reasons.

The credit note is a transparent and clear solution for the shopper and the store. In this article, we will discuss what credit note is used for. Let’s understand how you can use it to your benefit.

Did you know you may also get a credit note from an online store? Stay tuned to learn more.

What Is a Credit Note?

Credit credit-linked note, which we commonly call a credit note, is a credit memo. It holds a money token that you may use for a transaction. Every credit note has a validity period. So, you got to use it within that span.

Let’s say you have 50 credit points. If the value of each credit point is $0.80, the 50 points are valued at $45. You will get a $45 discount when you flaunt it while billing. 

A credit note is a popular replacement for refunds or price adjustments. In retail, the seller issues a credit note for invoicing errors, order cancellations, overpayments, or for damaged goods.

Key Features of a Credit Note

You already know why a credit note is issued. Now, let’s talk about some of the popular features of a credit note. For example, the credit note is mainly issued to adjust the credit note journal entry book.

On the other hand, it gives the customer a flexible option to shop at a store. Imagine a customer returns a faulty oven, bought at $55.

If you give him a cash refund, there is no surety that the customer will use the money to shop at your store. That’s where credit notes come in.

I shared an example of a credit note where each point is valued at slightly less than $1. However, there are many occasions where a shop’s credit points are valued at more than $1. But why would a shop do that, knowing it is deliberate loss-making?

Vital Features:

Well, here lies the crux of credit cards. When you issue a credit note, the customer may only use it within the same store. Once you leave the shop, the credit note won’t be valued a dime.

Secondly, it helps a retailer to balance the account book without much effort. For example, when product A is sold. The shop enters their records: “1 unit of product A is sold.” Adjacently, the sales result in a revenue equal to the sell price of the product.

When the customer returns the item, both these parameters change. But the problem can be solved with one credit note only. When you issue it, you can readily testify that a product unit of the price equal to that of product A is sold.

So, you can avoid making repetitive entries or adjusting existing entries. Meanwhile, the customers also fathom that a credit note is real value for money stuff. They feel they get surpluses from a shop when issuing credit notes.

Hence, they end up buying products that are valued more than the credit note on most occasions.

When to Use a Credit Note

When an invoice is canceled, the shop does not return to its accounts to cancel a sales entry. Instead, it issues a credit note. Now that you have it, you must use it tactfully so that it gives value for money spent.

After a customer survey, I made a list of example cases where you may apply your credit note for an added benefit:

1. It’s a B2B deal and one of the most common encounters that may occur in retail. Let’s say company A buys products worth $100 from Company B. But A promptly responds, stating an invoicing error.

2. Company B issues a credit note against the original bill and sends the same to A. Meanwhile, the old invoice is canceled, but $100 is entered as a positive exchange in the company books.

3. Company A has already paid $100 to company B. Now, A can shop for the same amount and produce the $100 credit note in exchange for money during billing.

Importance of Credit Notes in Accounting

Now, you have a genuine idea of the importance of credit notes in accounting. In general, you may think of a credit note as a microcredit. Each customer gets a specific credit note.

But bigger stores like Walmart use double-entry recordkeeping systems. So, the credit note amount goes to the debit section from the revenue records. But, under the account receivable, it is staged as credit. As I told you before, this phishing entry is essential for matching the balance.

Benefits of Using Credit Notes

Now you know what a credit note is or how it operates. Now let’s understand why using credit notes is beneficial:

Firstly, credit note transactions increase customer loyalty. Secondly, it makes your and the retailer’s financial adjustments similar. It is better than any of the similar ultra-short-term bonds.

So long as credit notes are there, you can duplicate and make casual overpayments.

How to Issue a Credit Note

Often, retailers can’t find a suitable template or may not be aware of the information that goes into credit notes. So, l thought of describing the process from scratch. Begin with selecting a suitable template that matches the theme and nature of your retail business.

You can select the template from any accounting software, excel or Word. Meanwhile, you may also use free invoice creating tools. For my home-run business, I use Invoice Ninja. However, other apps like Zoho Invoice, Square, and others are equally good.

Add all the business details in the second step, per the template. Some vital info there is address, logo, tax, registration ID, etc.

Next, input the primary details like the issue date, unique receipt ID no, the original invoice number, etc.

Finally, enter details like the customer’s name, address, the reason for the issue of a credit note, and the kind of refund (half, partial, or whole). When you’re done, recheck twice and enter the adjustment amount.

Now save and send your credit note to your system and the customer via your invoicing system.

Common Mistakes to Avoid When Issuing Credit Notes

A credit note can result in losses if you can’t avoid some common mistakes that retailers usually make. Firstly, check if the information is accurate and reflects the credible amount properly. Often, retailers do not issue original invoice numbers.

It doesn’t harm the customer, though. He will get his credit anyway. However, the retailer will have difficulty tallying the discount amount, which may eventually go into the loss book.

Secondly, I advise all retailers to avoid manual calculations in a hurry. It is the ones that are prone to most mistakes. Meanwhile, manual calculations also take a long time.

Lastly, always use a credit note to correct overbilling. Out of 500 orders, you may overbill 1 or 2 odd customers. That’s normal. But often, retailers issue informal tokens to customers, allowing them to shop for the extra amount for free.

Avoid doing that. In the long run, these token money receipts remain off-chart and unaccounted for.

FAQs About Credit Notes

A lot of retailers use credit notes, either formally or informally. However, most don’t know the right way to use it. So, they keep asking these questions in a loop:

Debit Note Vs Credit Note: Which is Better?

A debit note is just the opposite of a credit note. A credit note marks the adjustments in the amount that the seller owes. However, the debit note indicates the amount that the customer owes.

Got a credit note but unable to use it? Or want to know how to use it to the most benefit? Just comment here! We are here to answer your queries!