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Credit note? Refund? What’s the difference?

Credit note? Refund? What’s the difference?

After recently reviewing client bookkeeping queries, a common problem raised was being able to successfully account for the difference between entering a credit note compared with a refund. Many clients find it difficult to clarify between the two, and whilst these two concepts hold much synergy, they encompass two very different accounting treatments. To that end please find below a brief explanation and example to help clarify these entries and get your books and records looking clean and tidy!

What is a credit note?
 

The simplest way to think of a credit note is to underline the word “note” to help remember that this is a paper-based transaction only. A credit note is generated by a business to be offset against a previous invoice raised (whether in part or full). No physical monetary exchanges arise at this stage, but often a credit note will precede a refund whereby money does change hands. Remember if the business is VAT registered then the credit note would have element of VAT.

What is a refund?
 

This is where physical cash is returned. Typical illustrations are as a result of you refunding a customer who has overpaid your sales invoice, or that the customer was not happy with the product or service provided by you. In the second scenario you would raise a sales credit note before refunded the money to the customer (assuming the customer paid for the full sales invoice in the first instance).

 

Example
 

ABC Ltd constructs a machine for Customer B at an agreed sale of £100. After constructing this machine ABC Ltd delivers this item to Customer B attaching the sales invoice for £100.
 

Customer B duly pays this sales invoice in full on the same day.
 

After a few days this machine breaks down, causing Customer B to call ABC Ltd and demand compensation.

 

ABC Ltd agrees to refund 50% of the initial sales invoice. To that end ABC Ltd raised a credit note to be offset against the initial sales invoice, and in turn the £50 was refunded to Customer B as agreed.

 

Would you like assistance with your bookkeeping?
 

We hope you found this article useful for your business.
 

As part of our client services we provide training on request to take away the pains of bookkeeping, saving our clients time and money. If you would like more information about improving your bookkeeping or seeking new bookkeeping solutions then please call 0121 706 8585 and ask to speak with Alice O’Riordan.


 

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Disclaimer
 

The information provided in all of our blogs reflects only a narrative of some elements to consider on the topic. The blogs do not contain considered legal or accounting advice and should not be relied upon as advice. Please see our website's terms and conditions for full details of our disclaimer. If you are interested in obtaining advice, please contact us and one of our accountants will be happy and able to advise you on your own particular circumstances.

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