Skip to content

What is a Credit Note ? – Definition and Benefits

Table of Contents
what is a credit note
Reading Time: 4 minutes

Business owners know the significance of the credit note. What is a credit note? A credit note is a financial document that lets you purchase goods from the customer without any payment. An item may be eligible for return due to reasons such as quality or quantity issues, packaging defects, or instances where customers were charged incorrectly, and the tax invoice does not accurately reflect their payment. In such cases, both the buyer and the supplier are required to engage in accounting procedures. The issuance of a credit note enables the supplier to properly record the returned item in their financial records.

What is a Credit Note?

A Credit Note is also known as a credit memo. It is a financial document issued by the seller to the buyer with a reduction in the amount payable to the seller. Hence, when a credit note is issued to the buyer, the seller ensures that the reduced amount will be paid back to the customer. Or the reduced payment will be adjusted in the subsequent transaction.

Further, when the seller issues a credit note, the buyer will in turn issue a debit note back to the seller. Note that a credit note or a debit note can be created by using any online or ERP software.

When to issue a Credit note?

Based on businesses and the industry type, there are multiple reasons to issue a credit note and let us discuss some of the common ones —

1. One of the main reasons to issue a credit note is when the supplied goods are defective or damaged or if a wrong product is sent to the buyer.

2. Issuing a credit note when the seller charges more for the product than its actual price. A credit memo is issued to reverse the extra sum.

3. A credit note is also issued by the seller when the discount is not added to the original invoice at the time of purchase.

4. When a seller wants to cancel a payment from the buyer, a credit note is issued.

What does the Credit Note contain?

A credit note comprises HSN SAC codes (Harmonized System Nomenclature Service Accounting Code) related to the products involved, the name of the product or service, quantity, rate, taxable value, the integrated goods and service tax(IGST) including the total amount calculation after tax. In addition, it also has information on the buyer’s bank details who made the payments.

Further, information on other details is listed below :

  • The issue date
  • GST identification number of the buyer and supplier
  • Name and contact information of the buyer
  • Serial number and the corresponding tax invoicing date
  • Nature of the document

How do you issue Credit Notes?

We learned the meaning and function of the credit note. Now let’s learn how a credit note is prepared and issued to the customer. So, here we can take small business accounting as an example. Assume that one of your customers cancelled the purchase and you already issued an invoice to the customer. But now you need to cancel the transaction.

A credit note for the transaction’s total value has to be issued. For example, if you’ve generated an invoice for ₹50,000 and you intend to issue a credit note for the entire amount, then the note will indicate a value of ₹50,000.

Now, let’s delve deeper into a scenario where you’re making an adjustment for only 50% of the product’s (or service’s) value due to damage or other reasons. In such a case, your credit note will display a value of ₹25,000.

ERP software is an advanced and reliable solution to create accurate credit notes. In this system, there are various templates and formats from which a suitable one can be chosen based on the nature of the transaction.

How is a Credit Note treated under GST?

A business registered for GST, which issues credit notes, is required to provide comprehensive information about all the credit notes it issues in a given month when completing the GSTR-1 form for filing. Moreover, should the business make any revisions to a previously issued credit note, it must ensure that these amendments are included in the GSTR-1 form that it submits.

After the business files GSTR 1 with the information provided in the credit note, automatically the same detail will appear in GSTR 2A and GSTR 2B forms of the respective buyer.

Is a Credit Note similar to a Refund?

Many assume that a credit note is similar to a refund. They appear to be the same. So, the first main difference is that a seller gives a credit note to the buyer instead of a refund. Instead of a refund, the closest thing to the credit notes are vouchers. Some of the businesses consider the credit notes to be more strategic than a refund.

Credit Note vs. Debit Note

A credit note is a document issued by the seller to acknowledge their registered returns with the seller or supplier. A credit note can symbolise the acceptance of sales returns. A debit note is a document issued to the seller to notify them regarding the returns and the reasons for the returns. Consequently, the supplier’s account is charged (debited), while purchase returns are credited to the buyer’s accounts.

Also Read : What is the Accounting Cycle? Definition and Steps 

Benefits of Credit Notes for accounting process

Legal Acknowledgement – Credit notes are typically regarded as legally binding documents and serve as a means of maintaining records, similar to invoices. Through the provisions and documentation contained within a credit note, you can effectively monitor the accounting procedures related to your financial records, facilitating the tracking of reversals, deletions, or adjustments.

The use of credit is permitted. When your business or operation intends to provide stowaway or credit-based purchases, credit notes can serve as valuable tools for tracking these transactions.

ERP system to Automate Credit Notes

ERP helps in automating all the accounting process including credit notes. This will help the business to accurately send information to the buyer. Plus, it helps in recording the details in the appropriate books. When these tasks are automated, the employees can focus more on mission-critical tasks.

Conclusion

Credit notes with the original invoice or without the original invoice can be created with Accounting software. Automate this function with an ERP solution and provide the best customer experience.

Found this article interesting? Share it on