An organized invoicing system is a must-have for a small business setup. An advanced system can make this process effortless. There are various electronic invoicing systems available in the market that help to fasten the invoicing process. Billbook is one such platform that offers a seamless experience for small business owners or entrepreneurs to manage their invoicing process. But you may be wondering what happens when you cancel an invoice.
In case of partially paid or unpaid invoices that you need to cancel, you must follow certain rules and regulations. This is when credit notes come into the picture. To keep track of these canceled invoices you need credit notes which help you to organize your business financial data. Keep reading this article to learn more about credit notes!
Invoice Vs Credit Notes
Being a business owner you mustn’t get confused between credit notes and invoices. An invoice is a typical financial document that itemizes the services or products sold to the clients. It also provides clear details about the pricing of each item along with subtotal so that clients understand what they must pay.
On the other hand, a credit note comes in conjunction with the invoice that marks the change in the previous invoice. When a customer returns a particular product to the vendor for a certain issue, a credit note is attached with the invoice by the vendor to subtract the amount of the returned material.
The invoice tracks the business transaction, whereas, the credit note tracks the discrepancy in the product supplied. An invoice needs to get revised in cases like duplicate products, wrong items, or customer dissatisfaction with the service. A credit note mentions the deduction of the amount for the deleted item and states the fresh amount. This gives clarity to the client as to what amount they owe to the vendor.
Creating and Issuing a credit note
Creating a credit note is time-consuming as it needs to be accurate. A credit note should have all the details included in the invoice. Moreover, a credit note also has a unique number that refers to the invoicing sequence so that the transaction can be tracked in the future. A credit note is issued when there is a discrepancy in the products supplied or services offered. So while creating a credit note specific lines need to be eliminated to adjust the amount.
This entire process can be done manually and can be sent to the client via email. But this may seem tedious. To make the process faster you can take the help of any software platform that offers credit note templates. To be more specific about the functioning of the credit notes let’s understand what it includes and when this is used.
What should it include?
While creating a credit note you must ensure that you include all the key details. There is a specific outline that needs to be followed. Check out the important points!
- Firstly, give the heading “Credit Note” in bold so that clients understand the purpose of this document.
- Credit notes must be issued within one month of the agreement. It should mention the amount that is being reduced from the invoice.
- Credit notes must have a unique number for identification for future reference.
- f it is generated from the client’s end, then it should have the business’s name, address, and VAT number along with the issued date.
- Customer name and address should be mentioned if issued from the vendor’s end.
- Do mention the details as to why the credit note has been generated.
- Mention the total amount as well as the deducted amount. Mention the VAT rate as well.
When to use a credit note?
There are several ways to implement credit ways in your business. Taxation laws differ country-wise. Hence, avoiding the regulations for canceling a particular invoice may likely lead to audit and fines. When there is a change in the invoice like product duplication, wrong product, or any cancelation, the only legal way to change the invoice is to issue a credit note. Canceling the previous invoice and reissuing a credit note mentioning the canceled amount along with the final amount would help you to organize your finances. A credit note with detail about the changes helps to track the transaction for future reference.
Tips for implementing credit notes
Are you a freelancer or a small business owner? Do you still follow the old method of using spreadsheets for invoicing? Well, it’s time you switch to an updated version. Simply deleting lines to mark that the specific transaction or a particular product is canceled may create tax issues. If you are VAT registered then you may end up paying the tax on full sale if you don’t follow the regulations canceling an invoice.
Nowadays you get various platforms that offer templates for creating invoices instantly. In those templates, you can’t edit once the invoice is issued. In such cases, you will have to generate credit notes to show the changes. This helps in managing your finances legally. For clients who do not settle their payments on time you can create a credit note, instead, label them as “Bad debt” to show your business expenses.
How do credit notes help in bookkeeping?
Credit notes help in managing your financial records by tracking the completion of business transactions. There might be two probable cases when the credit note is issued. One before the invoice is paid and the second, after the invoice is paid.
In the first case, where the credit note is issued before the invoice is paid, first, you have to debit the amount under ‘Revenue’ and then credit it under ‘Account Receivable’. This helps to track the specific customers for future orders. In the second case, where the credit note is issued after the clearance of the invoice amount, then it will be recorded under Revenues and Account Receivable.
For the accounting software, this process is much easier, where bookkeeping is already included in it. In this accounting software, the credit and the debit amount get automatically linked with the invoice.
An invoice is a financing accounting tool that binds both the customer and the vendor on legal grounds. Same way credit notes also represent the business transaction legally that saves extra tax deduction. This article will provide detailed insight on the steps of creating a proper credit note for organizing your business accounting.