Understand Credit Invoices in detail

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Credit Invoices

Need of a Credit Invoice

If you are a business frequently selling products, you might be familiar with the term invoice, and if you are not, you must be aware of the term bill. Both the terms indicate the statements passed to the customers for the products/ goods /services sold. But they have a slight difference. Bills contain a high-level view of the total cost, whereas invoices are detailed. They provide a complete summary of the transaction of goods between the customer and the seller.

With transaction details, it becomes easier to keep track of the accounts of your business and keep the finances in place. But there can be errors in the invoices, or situations can change. For those erroneous cases, we use credit notes.

For example, a customer buys 5 different items from you online, and you send an invoice to them containing the cost of the items, their quantities, and the total amount due to him. The customer pays for the goods purchased, and on delivery, one of the items didn’t match the description, or he didn’t like the quality and wanted to return it and get a refund in its place. In this case, you have two options, directly refund the money and don’t log it in or create a credit invoice.

What is a Credit Note?

A credit invoice/credit note is the opposite of an invoice containing the amount due on the business to the customer. It is applied when a business needs to refund cash to its clients. For example, A client buys a watch for $360.00 and pays $400.00 for it. Now you have to return $40 to him, but you don’t have change right now, neither does he. So, you issue him a credit invoice of $40.00 as a promise to return the amount. Now, this $40 is pending on your side. The credit note represents either you have to pay back the cash or compensate it on some other purchase.


Is credit note a refund?

Yes, a credit note is an amount due on the business. It is the refund made by the business to the customer in the cases when:
  • customer returns a purchased item
  • Item was faulty
  • the customer paid more than the actual price

How does it work?

In the refund scenario, the business issues a credit invoice containing the list of items refunded with their cost and the total amount due on the business. This invoice is passed to the customer, assuring him to return the money.
But the question arises what benefit does issuing a credit invoice bring to the business?

The answer is it maintains the flow of cash in and cash out for the business. Using credit invoices, you can easily synchronize the money earned. Otherwise, online issuing an invoice and not reporting the refund may cause a conflict in actual revenue v/s revenue generated according to the invoice logs. It also helps to save you from paying tax for the revenue you didn’t generate as you have both invoice and credit invoice for a particular good sold. You can easily verify your earnings by having both types of invoices.

What are the advantages?

A credit invoice differs from an invoice as it debits the business side and credits the customer side.

A typical credit invoice has the following components.

  • Credit invoice number
  • Issue date
  • Due Date
  • Business details
  • Customer details
  • Items that are refunded
  • Quantity
  • Cost (with negative sign)
  • Any applicable taxes (with negative sign)
  • Total Amount (with negative sign)
  • Additional Notes on payment return methods
The due date is most of the time valid up to 12 months. If the customer doesn’t ask for a refund within the span of the due date, the invoice expires, and the business is no more liable to the customer.

How to Close a Credit invoice?

Closing a credit invoice can be done in two ways:
  • To incorporate it in an invoice
  • To generate a closing receipt with an authorized signature

Applying to an invoice

To apply a credit invoice to an invoice that is intended for a specific, follow these steps:
  1.  To incorporate it in an invoice
  2. To generate a closing receipt with an authorized signature
As the credit invoice has negative entries, it will balance out the positive entries of the invoice without affecting the subtotal.

3.  Add details to additional notes.

Now your invoice is ready to be sent to the customer.

4.Generate a receipt for the closed credit invoice, and you are good to go.

Directly generating Closing Receipts

Creating an invoice from scratch is a hard job, and we understand that, get a free downloadable credit invoice template with our invoice generator.

Get free downloadable credit Invoice template with Invoicelabs

Creating an invoice from scratch is a hard job, and we understand that, get a free downloadable credit invoice template with our invoice generator.

Our Invoice Generator has more for you

With a free invoice template, you can create an invoice, but with Invoicelabs, you can go a step further.
  • Send invoices
  • Accept online payments
  • Generate receipts
  • Track your history
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