When a customer returns items bought on credit, he or she seeks an acknowledgement from the seller and the cancellation of any outstanding debts. A credit note is a document submitted by a seller to a buyer as confirmation that the goods have been reported as (return inwards) and that they have been given credit for the amount due.

It lowers the amount due from the customer, and if the amount due is zero, it allows the customer to make additional transactions in place of the credit note.

A credit note is given only if, for instance: 

  • A customer has been charged incorrectly.
  • He/she has returned goods.
  • Cancels the order.

The credit note, as well as the calculations, should be double-checked by the client.

When is it necessary to issue a credit note?

Customers are given a credit note when:

an invoice in full.

  • Example of Credit note: The item(s) or service(s) has been returned.
  • A mistake was made on an invoice – for example; a customer was overcharged,
  • A customer was dissatisfied with a product or service they received.
  • You made a mistake on an invoice and are relieved that the client won’t have to pay. 

Key Features:

1. It is sent to notify the customer of the credit made to his or her account, as well as the reasons for it.

2. On this basis, the sales return book is revised. (In the event of a product return)

3. Common explanations include incomplete, damaged, or incorrectly sent items, among others.

4. It displays a negative value as it’s a way of letting a customer know that they don’t have to pay

For example:

In a (business to business) transaction, Company XYZ purchases products worth £ 2,00,000 from ABC; however, £ 20,000 worth of goods were discovered damaged due to some cause, and reported this to ABC company time of delivery.

In the name of Company-XYZ, ABC (seller) issues a credit note for £ 20,000. (buyer). This lowers ABC’s accounts receivable by £ 20,000, requiring the customer to pay just £ 1,80,000.

Refund Credit Note

A Refund Credit Note (RCN) is a piece of paper that lists the amount owed to a person for a cancelled booking. This is known as the “Refund Credit Value,” and it excludes non-refundable insurance costs.