Credit notes and their journal entries

A credit note serves as evidence for a transaction. Therefore, it is a source document just like a debit note and invoice. Also, it may be referred to as a commercial document. Because it is used mostly by traders. When it arises, there is a need to record the transaction in the books of accounts.

A. What is a credit note?

A credit note or memo is an instruction from the seller to the buyer to indicate that the goods sold are overcharged. The memo is proof that the client or customer will get a refund if he has already made payment. Or will not need to pay the full money in the invoice, if the contract is on credit terms. The difference in the amount of the invoice and the credit memo is what must be paid by the customer. 

B. Five Reasons for Credit Memo

The following reasons will lead to the sending of a credit note to the buyer

• If part or all of the goods are faulty.
• They failed to meet the specification of the buyer.
• The vendor needs to give a discount to the buyer.
• When the invoice price is overcharged in error.
• To reduce the debts of the debtor or creditor.

C. Other Explanations

The credit note corrects an overcharge in the invoice price of goods and services. This implies that it reduces the debts of both the debtor and the creditor. This is different from debit notes. What a debit note does is increase the debt of the debtor and creditor. That is, instead of the buyer expecting a refund from the seller or paying a lower amount as in credit notes, the customer will need to pay more or owe the supplier more money.

D. Credit note journal entry

Normally, when a source document is issued or received, it is processed through the accounting system of the organization. In a traditional accounting system, after a source document is initiated it goes to the subsidiary books and then to the ledger book. 

The journal can serve as a subsidiary book and may also be used to pass entries to the ledger books. For journal entry in the books of accounts of the supplier, the debtor's account is credited and the cash/bank account or return inwards is debited. Whereas, in the books of accounts of the debtor, the creditor’s account is debited and cash/bank or return outwards account is credited.