Some daily business activities and transactions include common terminologies that might get a little confusing and bounce over your head. But, the initial confusion should not stop or hamper your work. Do not Worry! none of these terminologies are tricky as solutions in chemistry labs.
Having a clear understanding of such business day to day terms and their usage is important for its fundamental growth. A deeper understanding of major difference between an invoice and a credit memo has been listed down here. It will help you have a clearer vision about the terms and their practical usage in the business.
What is an Invoice?
An invoice is an itemized list of entries for which a company has to make payments to its suppliers, vendors or service providers. The Accounts Payable Department receives invoices from the suppliers or vendors and scrutinizes it before processing it for payment. In most the cases, company issues Purchase Orders to its vendors, requesting the items to be supplied to them. The Accounts Payable Department matches the items listed on the Purchase Order with that of the Invoice and also verifies that the items are received by them to clear the invoice for the payment.
What is a Credit Memo or Credit Note?
So now you know, what are an Invoice and its role in your business. If everything is perfect, the items on the Purchase Order match perfectly with that of the invoice and products are received, the invoice is processed for the payment. But if, there appears any discrepancy, such as the items received are not in good order or wrong items are supplied, then the items are returned to the supplier. This is when a credit memo is issued.
For the items returned by a company to its vendor, the vendor needs to issue a credit memo for the returned items. A credit memo is issued when the client has paid advance payments to the vendors. This would ensure that the vendor has been informed about the discrepancy in supplying the goods and agrees to the credit memo to the customer for the items not supplied exactly that were asked through the Purchase Order.
So, what is the role of this note and how it represents invoice vs credit memo? The Accounts Payable Department of a company uses both the invoice and the credit note for the payment processing. It deducts the amount of the credit memo from that of the invoice and clears the payment for the vendor.
When is customer credit memo is issued?
There could be specific circumstances when you feel the need to issue a credit memo to your customer. Some common instances could be, as followed:
1. When you need to cancel an issued invoice fully or partially.
2. You are seeking partial credit for the wrong items supplied.
3. The goods have already been purchased earlier and you want to request a refund for the goods returned to the vendor.
How to issue a credit note?
Issuing this note is not a daunting task, whether you want to issue it manually or you are using any accounting software. You need to select the Invoice and the Credit Note to be reconciled. Then, choose the amount to reconcile as the value therein the credit note. When you apply the change, the reconciliation will be effected with a reduced invoice amount after deducting the amount in the credit note.
What do you need to include in your letter for credit note?
1. Start with the heading as ‘Credit Note’.
2. You should mention the value that you are reducing from the invoice vs credit note invoice.
3. It must be issued within a period of one month of the agreement.
4. Your credit note for the invoice should have a number for its identification, and issuing date. Do not forget to mention the name and address of your company and also the VAT number.
5. You also need to mention the name and address of the vendor or supplier you are crediting.
6. Mention the reason for issuing the credit invoice.
7. The total net amount for which you are seeking the credit (excluding VAT).
8. The rate of the applicable VAT and the amount to be credited under VAT.
9. The gross amount of credit, including the applicable VAT.
The above was the complete process to generate a credit note for your customer. Keep the same in mind, the next time you are generating one for your customers.
The much-confused terms of Invoice and Credit Memo would now hold a clearer statement in your mind. Two completely different yet common terminologies are important for day to day business functioning and require utmost clarity.
The difficulties of terms don’t make the task difficult for you as the sole owner or small business. It is something that can be done easily and professionally. Invoicera an online invoicing software easily help you to create professional-looking invoices, credit notes and other memos with ease of a few clicks. In order to have further clarity about the same.
Frequently Asked Questions
Ques: How is a credit note different from an invoice?
Ans: An invoice is an itemized bill issued by a business against the services offered. Whereas, a credit note is a promissory note offered to clients in exchange for returned orders.
Ques: When is a credit memo issued to a customer?
Ans: There could be specific circumstances when you feel the need to issue a credit memo to your customer. Some common instances could be, as followed:
- When you need to cancel an issued invoice fully or partially.
- You are seeking partial credit for the wrong items supplied.
- The goods have already been purchased earlier and you want to request a refund for the goods returned to the vendor.
Ques: Why Should you Choose Invoicera to automate Invoicing?
Ans: Invoicera is an automated online invoice software. A choice of more than 3 million users and 60+enterprises for customization, Invoicera has been impacting business processes for 15 years. Invoicera incorporates automation with invoice & payments management, staff management, time tracking, and approval process to streamline workflow.
Ques: Is a credit memo the same as an invoice?
Ans: No, a credit memo is released in exchange of returned goods that were paid already.
Ques: How do you write a credit note on an invoice?
Ans: You can simply deduct the credit memo amount from the invoice while creating one in your Invoicera dashboard.
Ques: What is the journal entry for a credit memo?
Ans: A credit memo is recorded in the current liabilities of the balance sheet.
Ques: Who prepares a credit memo?
Ans: The company issues a credit memo in exchange for returned goods to clients.
Ques: Is a credit note a refund?
Ans: Yes, a credit note is a written promise of a refund.
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