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What is a Credit Note

As a business owner, mistakes might creep in when sending out invoices to your customers. Or, your customers may have returned the products that you sent out to them for which they’ve already made the payment. It is important to properly account for these kinds of situations to ensure that they don’t materially affect your accounts. Here’s where sending out a credit note to your customers can help. Wish to know more about the meaning of a credit note and how it can help you, the business owner, in handling such issues? Continue reading to find out.  

What is a Credit Note? 

Now, a credit note is a financial document that business owners issue to their customers. The primary purpose of such a document is to put it in writing that a business owes a customer a certain amount of money, with a promise to repay or adjust the owed amount against future invoices. The customer, in turn, would issue a debit note from their end stating the same facts of the case. 

Here’s an example to help you better understand how a credit note works. Assume that you run a business and that you’re involved in wholesale Fast Moving Consumer Goods (FMCG). You send out a shipment worth Rs. 2 lakhs to one of your customers, which they have already paid for. However, some of the goods worth Rs. 20,000 get damaged in transit. As a result, your customer returns the damaged goods to you. Now, you owe the customer Rs. 20,000. 

In such a situation, you can either repay your customer the amount in cash or issue a credit note stating that you owe them Rs. 20,000 and that this amount will be adjusted in future invoices. You choose to issue a credit note instead. Your customer also issues a debit note stating the same facts to you.

What are Some of the Instances that Warrant a Credit Note?

Now that you’re aware of the meaning of a credit note, let’s take a look at the instances when a business may choose to issue a credit note to its customers.

  • When the goods sent to the buyer are returned due to damage, pilferage, or the wrong item being delivered. 
  • When the business sends a lower quantity of goods to the buyer.
  • When the business ends up charging more from a buyer.  
  • When a business fails to apply the necessary discounts when raising an invoice. 
  • When a business cancels the payment made by a buyer. 

What Information Should a Credit Note Contain?

A credit note, irrespective of the business issuing it, will contain certain information as standard. Here’s a quick look at what they are. 

  • The full name and address of the business
  • The date of issue of the credit note 
  • Complete information about the customer 
  • The GSTIN (GST Identification Number) of both the business and the customer 
  • The date, number, and details of the goods or services present on the original invoice
  • The reason for issuing the credit note
  • The serial number of the credit note and the amount of credit
  • Details of the terms of payment 
  • Signature of the authorised signatory of the business issuing the credit note

How Should a Business Account for a Credit Note? 

Most businesses these days operate on the double-entry bookkeeping method of accounting. In that case, the credit note that a business issue would have to be recorded by debiting their revenues. Similarly, the business or buyer who receives the said credit note would record it by crediting their accounts receivable. 

How is a Credit Note Treated Under GST? 

A GST-registered business that issues credit notes should specify the details of all of the notes issued by it during a month in the GSTR-1 form that it files. Also, if the business amends a credit note that was earlier issued by it, the details of the same should be included in the GSTR-1 form filed by it. 

Once the business files the GSTR-1 with the details of the credit note, the same will automatically appear in the GSTR-2A and GSTR-2B forms of the respective buyer. 

Conclusion

Credit notes are an excellent way for GST-registered businesses to rectify the discrepancy in the original tax invoices issued without having to cancel them and reissue new ones. This makes the entire process seamless and hassle-free for both the business and its buyers. Another great advantage is that there’s no time limit for issuing a credit note. However, as per GST laws, a business must declare the issue of credit notes in a financial year before 30th September of the following year or the date of filing of the annual return, whichever is earlier.

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