Journal Entry for Credit Note

Credit note (credit memo) is the business document that supplier provide credit to the customer. It is a confirmation from seller to reduce previous invoice amount due to overcharge or sale return. Customers can use it as the evident to decrease the accounts payable outstanding amount.

Supplier bill invoice to the customers to demand for payment after deliver goods or service. Customer should pay base on the invoice if nothing goes wrong. Credit note is opposite from the invoice. It means the customer will receive credit instead of the charging amount.

The credit note is used when the supplier overcharge the customers. So they issue the credit note to reduce the accounts receivable balance. On the other hand, customer can use the credit note to reduce their accounts payable as well. It will be net off when the customer make payment to supplier.

It also use when the customer return the goods due to various reasons. The supplier will check if their products are really defective and accept accordingly. After receiving the return goods, supplier needs to issue credit note to reverse the previous invoice and reduce the accounts receivable.

Journal Entry for a Credit Note

When supplier issue credit note, they want to correct the previous invoice issue due to error, goods return and so on. The credit note will reduce the accounts receivable balance and credit revenue.

This transaction will correct the accounts receivable amount and reduce the revenue recognition which incur due to error invoice. We can use credit note only when the supplier over bill the customers. If they under bill, they need to issue additional invoice to the customer.

If the credit note issue for goods return due to quality issue, supplier need to correct accounts receivable and sale return which is the contra account of sale revenue.

Sale return is the contra account of the revenue, so this transaction will reduce the net revenue on income statement. At the same time, it also reduce the accounts receivable balance.

When customers receive the credit note, they need to decrease the accounts payable balance as well as the inventory or assets that purchase from supplier. Both transaction above will have the same impact to the customer financial statement.

The journal entry is debiting accounts payable and credit assets such as inventory or fixed assets.

If the credit note to reduce previous invoice, the customer need to reduce a portion of accounts payable and assets. If the credit note is used for sale return, this entry will eliminate a whole payable and assets that return to supplier.

Journal Entry for Credit Note Example

ABC is fabric manufacturer that supply raw material to many garment factory. During the year the company has issue credit note to the following:

• Credit note to company XYZ amount $ 10,000 for the overcharge invoice.
• Credit note issue to company Z amount $ 5,000 for the sale return due to quality issue

Please prepare journal entry for both transactions.

When the company issue credit note for XYZ due to over charge, ABC need to reverse the accounts receivable and revenue. The journal entry is the debit sale revenue $ 10,000 and credit accounts receivable.

As the company issue wrong invoice, so the company over charge the customer. This transaction will reduce the accounts receivable and revenue by $ 10,000.

When ABC issue credit note to company Z for sale return, they need to reverse the accounts receivable and debit sale return.

The transaction will decrease the accounts receivable and debit sale return which is contra account of sale revenue.

Credit note template

Credit note is the commercial document that need to include the following items:

• Name of the issuing company
• Name of the customer
• Reference number which is sequential
• Date which credit note issue
• The amount to be credit to customer
• A description of the items or services that were originally invoiced, as well as a reference to their invoice number.