Invoice VS Credit Memo- When Your Business Should Use It?

You might come across common terminologies that might get a little confusing and bounce over your head while performing your daily business activities and making your regular transactions. But, this should not hamper your work and business productivity. If you’re panicking about these terms, then you no longer need to as none of these terminologies are tricky as chemistry labs solutions. However, it's important for one to have a clear understanding of such business day to day terms for its fundamental growth. To help you get a deeper understanding of the major difference between an invoice and a credit memo, we have listed down the differences for you. It will help you have a clearer vision about the terms and their practical usage such as to unapply credit in QuickBooks.

A Brief On Invoice

An invoice is an itemized list of entries for which a company has to make payments to its suppliers, vendors or service providers. The Accounts Payable Department receives invoices from the suppliers or vendors and scrutinizes it before processing it for payment. In most of the cases, the company issues Purchase Orders to its vendors, requesting the items to be supplied to them. The Accounts Payable Department matches the items listed on the Purchase Order with that of the Invoice and also verifies that the items are received by them to clear the invoice for the payment.

Credit Memo or Credit Note: A Brief Description

So now you know what an Invoice and its role in your business. If everything is perfect, the items on the Purchase Order match perfectly with that of the invoice and products are received, the invoice is processed for the payment. But if there appears to be any discrepancy, such as the items received are not in good order or wrong items are supplied, then the items are returned to the supplier. This is when a credit memo is issued. For the items returned by a company to its vendor, the vendor needs to issue a credit memo for the returned items.

A credit memo is issued when the client has paid advance payments to the vendors. This would ensure that the vendor has been informed about the discrepancy in supplying the goods and agrees to the credit memo to the customer for the items not supplied exactly that were asked through the Purchase Order. So, what is the role of this note and how does it represent invoice vs credit memo? The Accounts Payable Department of a company uses both the invoice and the credit note for the payment processing. It deducts the amount of the credit memo from that of the invoice and clears the payment for the vendor. Moreover, you can also seek assistance for processes that may help you unapply credit in QuickBooks.

When Can You Issue A Customer Credit Memo?

There could be specific circumstances when you feel the need to issue a credit memo to your customer. Some common instances could be, as followed:

1. When you need to cancel an issued invoice fully or partially.

2. You are seeking a partial credit for the wrong items supplied.

3. The goods have already been purchased earlier and you want to request a refund for the goods returned to the vendor.

Here's How You Can Issue A Credit Note

Issuing this note is not a daunting task, whether you want to issue it manually or you are using any accounting software. You need to select the Invoice and the Credit Note to be reconciled. Then, choose the amount to reconcile as the value therein the credit note. When you apply the change, the reconciliation will be effected with a reduced invoice amount after deducting the amount in the credit note.

What Must You Include In Your Letter For Credit Note?

1. Start with the heading as ‘Credit Note’.

2. You should mention the value that you are reducing from the invoice vs credit note invoice.

3. It must be issued within a period of one month of the agreement.

4. Your credit note for invoice should have a number for its identification, and an issuing date. Do not forget to mention the name and address of your company and also the VAT number.

5. You also need to mention the name and address of the vendor or supplier you are crediting.

6. Mention the reason for issuing the credit invoice.

7. The total net amount for which you are seeking the credit (excluding VAT).

8. The rate of the applicable VAT and the amount to be credited under VAT.

9. The gross amount of credit, including the applicable VAT.

The above was the complete process to generate a credit note for your customer. Keep the same in mind, the next time you are generating one for your customers.

Also read: Convert Quicken to QuickBooks

Wrapping It Up

We hope the above provided information would have helped you get a clear idea of the credit memo and the invoice. However, there might be instances where you would get confused about it and thus, need professional assistance. Well, in such a situation, we would suggest you to give us a call on our Helpline Number +1-(855)-955-1942 and get in touch with our experts.