Invoice, sales, credit memo etc. are some common terms for any finance professional. However for a common man all this might sound tricky as 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 of 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, it explains above, what is an invoice. If everything is perfect, the items on the Purchase Order match perfectly with that of the invoice and products are received (invoice vs credit memo) deprived in good order, 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.
How Invoice Vs Credit Memo relates ? For the items returned by a company to its vendor, the vendor needs to be issued a credit memo for the returned items. 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 meaning of this note and how to represent 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 a 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 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 invoice should have a number for its identification, and an 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 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 to your customer. Keep the same in mind, the next time you are generating one for your customers.
The above differentiation would now have sorted out much of your confusions about generating an invoice or a credit memo. The difficulties of terms doesn’t make the task difficult for you as sole owner or small business. It is something that can be done easily and professionally. Invoicera an online invoicing softwares 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.