Credit Note is a receipt given by a shop to a customer who has returned goods, which can be offset against future purchases. It is a statement (note) issued by a seller giving credit to the buyer for any incorrect billing by the seller. This is a commercial document that the supplier produces for the customer to notify the customer that credit is being applied to the customer for various reasons. It is an invoice monetary document circulate by a retailer to a customer. It acts as a source document for the sales return journal. In other words, the credit note is evidence of the reduction in sales. Incorrect billing may take place when a customer has returned some goods or has been overcharged or an allowance is made for any other reasons such as short weight, damage in transit, etc.
A credit note is issued for the value of goods returned by the customer, it may be less than or equal to the total amount of the order. It is a useful and legitimate way in which the amount of the goods and services in the original tax invoice can alter or updates. It will normally reference the original invoice and state the reason for the credit note.
Important Characteristics –
- It is sent to inform about the credit made in the account of the buyer along with the reasons.
- The sales return book is updated on its basis. (In case of return of goods)
- It is usually sent by the seller if the goods are found incomplete, damaged or incorrect at the buyer’s end.
Functions and uses –
Credit notes function as a reference record for the Sales return journal. Basically, it is proof of the decline in sales.
- The prime use of the credit notes is that it permits a buyer to buy a good or service from the retailer on a future date in a form of credit.
- It is basically a gesture of proof and evidence to a buyer who requires to return earlier purchase the product rather than cash repayment.
- To allow the buyer to purchase an item or service from that seller on a future date, i.e. a gift card or store card credit.
- In the matter of returned goods for accounting objectives, the credit notes play an important part.
- It reduces the amount due to be paid by the customer, (if the amount due is Nil) then it allows further purchases in lieu of the credit note itself.