Small or large, every business follows a similar process: letting customers purchase items, issuing a final invoice, and getting paid. Simple, isn’t it? However, it can be challenging when a customer asks to return an item. This is because giving back the money isn’t that easy; you need to make changes in the records and issue an invoice along with a credit note.
At this point, a credit invoice or a credit memo plays a vital role in your billing process, reducing unnecessary workload. A credit invoice is not something new but is frequently used in accounting terms.
Many beginners who are still in the learning phase may not know what a credit invoice or credit memo is all about. Worry not! We have an ultimate guide on what is a credit invoice and how to make one. So, let’s get off the mark with its definition.
What is a Credit Invoice?
A credit invoice is a document showcasing the money being credited back to the final invoice usually because of the customer refunds or possible accounting errors in the invoice made by the seller.
If a business owner overcharges the buyers or receives sold goods back, then they will provide a credit invoice with an adjusted amount instead of sharing a fresh invoice. In such instances, your money gets refunded, or else the customer’s account is credited with the same amount mentioned in the credit note. Such things can be kept in a record for future purchases.
Credit invoices help you revise the outstanding amount without removing the original invoices from accounting records if you use accounting software. Simply put, credit invoices, newly made documents, are created to modify the original invoice.
Such credit invoices assist in tracking refunds allotted or adjustments made to the accounts receivables, helping you manage your finances more easily.
What is a Credit Invoice Used for?
Amendments to the original invoice and updating the customer account can be due to several reasons. Here are some common factors for using credit invoices.
1. Partial or Full Refund
Credit invoices are mainly used when a customer makes a return. Once the return of an item is approved, you need to initiate a partial or full refund as per your company’s policy. In this scenario, credit invoices are issued for maintaining records of the amount to be paid to the buyer. Let us take a credit invoice or a credit memo example; if a customer has bought 2 pairs of shoes from your store and asks you to return one pair, then you need to issue a credit invoice for the returned item only.
2. Dispute Over Invoice
In case you mistakenly overcharge your buyer on the previously issued invoice, you need to revise the amount using credit invoices. It is something that disappoints customers who are being wrongly charged for the items. At this point, sellers usually agree to reduce the price to settle the dispute and send the credit invoices rather than generating a fresh invoice copy.
3. Error on the Seller’s End
Who doesn’t make mistakes? Invoices are prone to errors, especially when they are made using a piece of paper. If it happens, then you need to share a credit invoice instead of correcting the amount in the original invoice.
Such seller-side errors are usually due to missing discounts on the final price. Also, minor errors due to fluctuation in retail price can also lead to issuing a credit invoice. If needed you can add a credit note easily and maintain accurate financial records on the go.
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Benefits of Using a Credit Invoice
Issuing credit invoices leads to several benefits that help you inch closer to business success. Below are a handful of them.
1. Accurate records
Credit invoices not only help you maintain financial records but also make it easier to track adjustments carried out to original invoices. Such things leave no chance of errors, helping you prepare a comprehensive business report to get insights into sales patterns.
2. Transparency
Another benefit you get is complete transparency, to both supplier and buyer, reducing the chances of disputes in the future. A process of sharing credit invoices means your business is committed to fair billing practices, which reinforce trust from new and existing customers.
3. Legal Compliance
Credit invoices help you comply with legal formalities, as all things such as refunds and returned items are clearly documented. These documents further help you during tax season, as you will have every transaction detail stored in an organized manner.
4. Healthy Customer Relationship
A credit note can be utilized to resolve misunderstandings or disputes, as they show that money has been returned to the buyers, boosting customer satisfaction. Initiating quick refunds and sending credit invoices indicates how well you take care of your customers, ultimately strengthening customer relationships.
How to Create a Credit Invoice
Creating a credit invoice means you need to go back to the original invoice where you can make revisions, highlighting the amount that needs to be paid by you. Since manually searching the original invoice and then making amendments is tedious, here we have an efficient way to include credit notes without compromising the invoice quality.
Moon Invoice, a reliable billing software, has made the invoicing process a breeze. In fact, it has turned the tables for small businesses and freelancers, allowing them to make every type of invoice in a matter of minutes. Just like them, you too, can utilize automation tools to issue a credit memo quickly and satisfy customers.
So, no wonder why Moon Invoice is the best bet as far as generating a credit note is concerned. Below is how to add a credit note using Moon Invoice.
1. Open Moon Invoice App
Firstly, download the Moon Invoice app on your smartphone or tablet and log in with your credentials. Whether it is iOS or Android, we have an app for every platform. Opening the app, you will see a dashboard where recent activities will appear.
2. Find ‘Credit Notes’
Next, find ‘Credit Notes’ from the menu options located at the bottom of your screen. Regardless of whether the original invoice was created or not, you can use this feature to include credit notes and maintain your accounting records.
3. Enter Required Details
Tap on the credit notes and start creating a new credit note by filling in the necessary details. If available, you can also select the invoice that has already been created from the drop-down list and simply add credit notes. Or else, create a completely new credit note for your financial records.
4. Review & Save
Once you are done entering details like adjusted amount, discounts, goods quantity, and terms & conditions, review the credit invoice at your own pace. If everything is as you want it to be, hit the ‘save’ button, and your credit note will be added to the particular invoice you choose.
What Should Be on a Credit Invoice?
Credit invoices are no different than a normal invoice copy. It is mainly used to highlight the amount credited back to the customer’s account for clarity. The format and design almost remain the same as a regular invoice, however, the total refunded amount is added in the credit invoice.
Nowadays you can even download a readymade credit invoice template using software. Or else, if you had previously created a credit memo using any online tools, then put a credit note in your existing invoice without creating it from scratch. Creating it for the first time? Here are a few elements that you must include in the credit invoice.
- Invoice number: Mention a unique invoice number on the top of a credit invoice. Plus, you must add the date when the invoice has been issued.
- Business details: Enter business details such as owner’s name, office location, phone number, and official email ID.
- Buyer’s information: Describe to whom the credit invoice is issued. Write the client’s name, residential address, and contact details.
- List of products: Enter details of returned products along with their quantities and rates offered at the time of sale.
- Credit note: Showcase how much is the total amount that you need to return to the buyer.
Do Credit Invoices Really Differ from Credit Notes?
Credit invoices and credit notes are two accounting terms with similar concepts, but they differ in many ways. A credit invoice or a credit memo is issued when a customer returns an item, and it is used to revise the billing amount if necessary. It is a convenient option when accepting returned items from buyers because you don’t need to make revisions to the original invoice or create a new one from scratch.
On the other hand, a credit note is used when a supplier has mistakenly overcharged the customer or missed adding discounts to the final price. A credit note is added to the invoice to correct the total amount without asking customers to return the sold goods. Sometimes, credit notes are mistaken for debit notes because their names are closely related.
However, debit notes are different from credit notes as they are used by suppliers when demanding additional fees from customers for delivered products. Whereas, credit notes are not for requesting payments. They only indicate that the amount has been revised after applying discounts or correcting the invoice error.
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Conclusion
As we inch closer to the conclusion part, we hope now you know the credit invoice meaning and how to create it.
Credit invoices are helpful in numerous ways, which we discussed above. It garners customers’ trust and customer loyalty when they realize your easy return process and quick sharing of credit invoices.
Creating an invoice is easier when you have robust invoicing software like Moon Invoice. It neither takes more time nor compromises the quality of an invoice. If needed you can put on credit notes easily and keep financial records organized.
Consequently, there is no need to follow lengthy paperwork in case a customer requests a return or when revising an invoice. Avail of a free trial to know more.
FAQs
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
