Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.
Running a small business often means that you need to wear multiple hats. So, some days you may be chief financial officer and others you may be operations director.
When it comes to managing your business finances, it can sometimes be confusing and time consuming. That’s why we want to help you understand the different parts involved.
In the following article, we’ll be focusing on credit notes, including what a credit note is and when to use one.
What is a credit note?
A credit note is an official document sent out by a business’s finance department to a client. The credit note follows an invoice when an order or sale needs to be cancelled or amended.
It’s essentially a legal document that allows you to lawfully amend an invoice, without having to delete or alter it. As all invoices must be kept for audit purposes, the credit note allows you to keep an accurate paper trail without amending any of the document history.
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How does a credit note work?
A credit note should correlate to an invoice and show a negative balance against it. For example, if you want to completely refund your client on a £100 sale, then your credit note should say -£100. Alternatively, if you overcharged a client by £50, then your credit note should say -£50.
One of the great things about issuing a credit note is that it allows you to keep all of your finances streamlined and intact. For example, if your first invoice was number 1, then the credit note would be number 2 and the invoice that follows that would be number 3.
When should you use a credit note?
You should issue the credit note in the following circumstances:
- If an order has been cancelled.
- If an order needs to be amended after the invoice has been generated.
- A mistake was made on the initial invoice.
- Your client would like a refund.
If there is a change to an order where the amount is going to increase, then it would be necessary to re-issue a new invoice. However, a credit note should always be used for when there is a negative balance, and you owe the client money.
What information should a credit note include?
While a credit note should follow a general structure, it usually doesn’t need to be as strict as the structure of an invoice.
However, there are a number of things that you should include to keep things simple for both yourself and your client – especially when it comes to doing the admin work or any auditing.
The following should be included in your credit note:
- The date the credit note was issued
- The credit note number (this should correspond with the invoice number)
- A customer or order reference number
- Payment terms and conditions
- Yours and your customer’s contact details
- The reason for issuing the credit note
The document should clearly state that it is a credit note and not another invoice. To keep this simple, it’s best to have two different templates set up and ready to use.
If VAT was included on the initial invoice, then you would also need to include VAT separately on the credit note.
What’s the easiest way to issue a credit note?
Invoicing software – such as Square Invoices – can be an effective way to stay on top of the admin side of your finances, without it getting complicated.
Square Invoices allows you to quickly send digital estimates, invoices and credit notes to your customers, anytime and anywhere. You can track which invoices are paid and unpaid, match up credit notes to the original invoice and send payment reminders – all in real time.
You can use the accounting software to create separate invoice and credit note templates that will save you time going forward.
How long does a credit note last?
A credit note is legally required to be stored for a minimum of six years, alongside the relevant invoices. While it’s important to keep GDPR in mind and delete a previous client’s details should they ask you to, you will still need to keep financial information for legal and auditing purposes.
Getting started with Square Invoices
Square Invoices free accounting software is an easy way for small business owners to get up and running with their finances. You can easily keep track of your incomings and outgoings, automatically generate invoices and credit notes, and stay on top of audit trails for when the time comes.
While managing your business by yourself can seem like an overwhelming task, Square’s Invoice software makes your business’s everyday finances much easier to manage. Check out our best practice tips for using Square Invoices