When customers return items, they might receive a credit note or a refund. How do businesses record this? Which bookkeeping accounts need to be debited and credited? This article explains the treatment of supplier and customer credit notes. It also discusses the difference between credit notes to be received and credit notes to be issued.

Key takeaways

• Credit notes correct previous invoices, often after buyers return goods.
  
• The timing and reason for issuing or receiving a credit note determine its accounting treatment.
  
• Accounting entries differ depending on whether the business is the issuer or the recipient.
  
• If a business records a credit note to be received or issued at the end of a fiscal year, reverse the entry on the first day of the following accounting period.
  

What is a credit note, and what is it for?

Credit notes are accounting documents issued by sellers to correct previously sent bills. In France, to preserve a record of all transactions, invoices cannot be deleted or modified once issued. Credit notes, also called credit memos, cancel out previous invoices and allow sellers to recognize debts to customers.

They often correct invoice errors (e.g., overpayments), reflect returned merchandise, or provide goodwill compensation after a sale. Businesses that receive credit notes from suppliers must account for them in their records. Businesses also need to enter the memos they create.

When are credit notes recorded?

Credit notes can be recorded either during the accounting period or at its close. If a note is issued or received within the accounting period, record it immediately. If the note has not been received or issued by the end of that period, the entity must enter it as a credit note to be received (client side) or to be issued (supplier side).

How to record supplier credit notes

The timing and reason for issuing a supplier credit note determine the entry. First, we will discuss how to record a credit note obtained within the accounting period.

During the accounting period: Credit notes for discounts and reductions

To record credit notes issued as a gesture of goodwill, businesses must:

• Debit account 4011 “Suppliers – Purchase of goods and services” in the amount of the credit note, inclusive of tax
  
• Credit account 44566 “VAT deductible on other goods and services” in the amount of the value-added tax (VAT)
  
• Credit account 609 “Discounts, rebates, and reductions on purchases” in the amount of the credit note, exclusive of tax
  

At the end of the accounting period, reconcile account 609. Record discounts under the appropriate purchase account.

During the accounting period: Credit notes for fixed assets

If a credit note is related to fixed assets, the business must:

• Debit account 4041 “Suppliers – Purchase of fixed assets” in the amount of the credit note, inclusive of tax
  
• Credit account 44562 in the amount of the VAT
  
• Credit the class 2 account “Fixed assets” in the amount of the credit note, exclusive of tax
  

During the accounting period: Credit notes for merchandise returns

If merchandise returns to the supplier, make the following entries:

• Debit account 4011 in the amount of the credit note, inclusive of tax
  
• Credit account 44566 in the amount of the VAT
  
• Credit account 607 “Merchandise purchases” in the amount of the credit note, exclusive of tax
  

At the end of the accounting period

If, at the end of the accounting period, the business has not obtained a credit note owed to it, enter the note as a credit note to be received. Record credit notes to be received as follows:

• Debit account 4098 “Future discounts, rebates, and reductions and other credit notes not yet received” in the amount of the credit note, inclusive of tax
  
• Credit account 44586 “Income tax on invoices not received” in the amount of the VAT
  
• Credit the appropriate class 6 account in the amount of the credit note, exclusive of tax
  

How to record customer credit notes

The issuer must also account for credit notes in their books to recognize the revenue reduction, record the customer invoice, and reconcile the VAT.

During the accounting period: Credit notes for post-sale discounts and reductions

If a supplier grants a discount or reduction after a sale takes place, it must:

• Debit account 709 “Discounts, rebates, and reductions granted by the business” in the amount of the credit note, exclusive of tax
  
• Debit account 44571 “VAT collected” in the amount of the VAT
  
• Credit account 411 “Customers” in the amount of the credit note, inclusive of tax
  

It must also reconcile account 709 at the end of the accounting period.

During the accounting period: Credit notes for merchandise returns or service cancellations

Record credit notes issued for returned goods or canceled services in the opposite direction to the initial sale. The business must:

• Debit the class 7 account used for the sale in the amount without tax (e.g., 707 for “Merchandise sales,” 701 for “Sales of finished products,” or 706 for “Services”)
  
• Debit account 44571 in the amount of the VAT
  
• Credit account 411 in the amount of the note, inclusive of tax
  

At the end of the accounting period

If, at the end of the accounting period, a granted credit note remains unsent, record it as a credit note to be issued. Enter credit notes to be issued as follows:

• Debit the appropriate class 7 account in the amount of the note, exclusive of tax
  
• Debit account 44587 “VAT on invoices to be issued” in the amount of the VAT
  
• Credit account 4198 “Future discounts, rebates, and reductions and other credit notes to be issued” in the amount of the credit note, inclusive of tax
  

What do businesses need to do after recording credit notes to be received or issued?

On the first day of the next accounting period, businesses must reverse the entries for credit notes issued and received to maintain separate accounting periods. Doing so helps prevent double entries when recording the note.

Record the actual credit note as usual. Efficient accounting software can manage these adjustments and make them easier to post and track in a business’s books.

How Stripe Revenue Recognition can help

Stripe Revenue Recognition helps to streamline accrual accounting—including audits, end-of-month close, reporting, and more—so you can close your books with greater efficiency and accuracy. It automates and configures revenue reports to help support compliance with ASC 606 and IFRS 15.

Revenue Recognition can help you:

• Gain a more complete view of your revenue: In the Stripe Dashboard, see all your Stripe transactions and terms, and import non-Stripe data.
  
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Learn more about how Revenue Recognition can help you comply with global accounting principles, or get started today.