What Is a Credit Invoice?
Credit invoices are a useful way for businesses to account for mistakes and customer refunds in the accounts.
You may have heard the terms credit note and credit memo before. What is a credit invoice?
Well, it’s the same thing and the terms are often interchangeable.
It’s a tool that can be particularly useful to small businesses.
When you send a customer an invoice, you’re requesting payment from them for goods or services you have provided.
A customer will then usually pay your invoice and complete the transaction.
Occasionally, there will be a need for either all or some of the money paid to be returned to a client. Where this happens, a credit note can be used to “credit” the customer the amount due to them.
Here’s how you should handle processing a credit invoice.
Here’s What We’ll Cover:
When and Why Should You Use a Credit Invoice?
There is a wide range of circumstances that might lead to you preparing a credit invoice for a client. Below are a few examples.
The customer asks for a refund
This can be for any number of reasons, such as the product being faulty or receiving the wrong items.
When a customer returns goods to you that they have already paid for, they’re usually entitled to a refund.
A credit note can be given in this circumstance and is probably the most common use for it.
It helps both you and your customer to keep track of what is due to be received/paid. It is also good record-keeping for your accounts as you’ll have a paper trail of your actions in the matter.
Partial credit for a part-refund
Another type of credit invoice you might produce, similar to the above, is for a partial refund.
If a customer buys several products from you and returns one, you can process an invoice providing credit just for the item that has been returned.
An error with the amount on the original invoice
The amount on the original invoice might have been wrong due to not applying a discount or adding figures incorrectly.
A credit note can be used to rectify the problem for the customer.
Regular customers may already have paid some money on account and want to use this as full or partial payment of their bill.
A credit invoice can therefore be used by business owners as a form of receipt for the customer.
If an outstanding balance is still required, a further credit memo can then be produced taking into account what has already been paid.
The invoice was issued by mistake
Again, mistakes are inevitable when running a business.
If you've invoiced a customer by mistake, you can give them a credit invoice to show that they don't need to pay.
Keep a record of the initial sale in your accounts
A credit invoice helps you to keep your accounts in good order.
It is a way of recording the original sale on the system in the event of a refund and return.
It is almost impossible to keep track of every sale for each customer. It can therefore be difficult to work out what happened in a matter where a clear paper trail isn’t kept.
It can also leave your books short by not properly accounting for money coming in and going out.
What Are the Benefits Of Using a Credit Invoice?
One benefit is that it is often more accurate than simply removing the invoice from the system.
It helps to keep accounting records clear and accurate.
Removing an invoice from the system might not even be possible and isn’t generally considered good practice. Keeping a credit invoice on file will instead show that the money came in from the customer and was then returned in the form of credit.
This helps to keep your client’s account up to date and you can adjust your accounts receivables and sales tax records accordingly.
What Should Be on a Credit Invoice?
A credit invoice will usually follow the same structure as a normal invoice. As an invoice is a legally binding document, there are certain details that it needs to include.
The invoicing software you use should provide you with a template to generate a credit note from an invoice you had already created.
Simply edit the template document according to what needs to be done for the customer.
A credit invoice will then be set up on the system with its own reference number. This helps to link both documents together, which keeps your client’s account (and your own) up to date.
What Is a Debit Invoice?
If there’s a credit invoice, there has to be a debit invoice, right?
After having looked at the question “what is a credit invoice?”, it’s a good idea to briefly look at what a debit invoice is. It’s quite simple as you might expect.
If a customer has purchased something from a seller and for some reason has not paid enough, they may be issued a debit memo.
This could happen for any number of reasons, including customs or freight charges that have been prepaid by the seller. Or, a situation in which the buyer is no longer entitled to an applied promotional discount.
A credit and debit invoice are just two examples of the different types of invoices you might use.
Accounting for Credit Invoices in Your Bookkeeping
Accounting for credit invoices in your bookkeeping doesn’t need to be difficult or put any additional burden on your accounting team.
How you process and record the invoice will depend on whether you issued an initial invoice or not and whether it has been paid.
If the invoice was paid and you are looking to return some money to the customer, you should record it under Revenue and Accounts Receivable. This will adjust the amount recorded in your accounts.
If the invoice has not yet been paid, you can debit the amount in question under “Revenue” and record a credit in “Accounts Receivable.” That credits the account of that particular customer for future orders.
Let’s Wrap It up
Credit memo, note, or invoice, whatever you like to call them, can be a really useful tool for business owners to use.
They offer a quick and easy way to account for monies that are due back to the customer.
Dealing with these quickly and efficiently is essential to customer loyalty, as this makes sure they feel valued.
Using credit invoices keeps your accounts easy to understand and makes life easier when it comes to balancing the books.