How to Handle a Supplier Credit Note
Goods come back damaged. A price was wrong. A count was short. When a firm owes you a fix, the paper it sends is a credit note — a bill in reverse, cutting what you owe. Knowing how to handle a supplier credit note keeps that fix from fading: credits are the most lost money in a small firm's books, lost not by theft but by fog.
A credit note is not cash and it is not a new bill. It is a claim on the firm that sent it, worth its sum, good till you use it — or till it slips off a desk, out of a sheet, past a staff change. This guide gives the note a path: check it, net it, file it, and chase it if it stalls.
Credit notes are born at the match desk most often: a count split or a price split that the five checks or the three-way match caught. If you run those checks, you will ask for credit notes as a matter of course — and you will hold the proof that earns them.
Here is the full life of the note, from the ask to the file.
What a credit note is — and is not
A credit note is the firm's own record that your debt to them fell. It names the bill it fixes, the rows or sums it cuts, and the reason in brief: goods returned, price put right, count made good. The sum on it is a sum you no longer owe — or, if you paid the bill in full, a sum the firm owes you.
| Paper | What it does | What you do with it |
|---|---|---|
| Invoice | Raises what you owe | Check it, match it, pay it |
| Credit note | Cuts what you owe | Check it, net it off, file it |
| Refund | Pays cash back to you | Match it to the credit note it settles |
| Statement | Lists what the firm thinks you owe | Check each line back to a bill or a credit |
A credit note is not a discount on a future buy, though firms may dress it as one. A discount is a price you agree for goods to come. A credit is a fix for goods that came — or did not. Keep the two apart in your sheet, since a credit has a bill it belongs to and a discount does not. Mixed up, the credit gets spent twice or not at all.
Note the tax line. A credit on taxed goods should carry its own tax cut, so your tax sums stay true. A note that cuts the sum but not the tax leaves your tax claim high by the tax on the cut — a small wrong that grows teeth at filing time. Check the tax on the note the way you check it on a bill.
Check the note against the bill it fixes
A credit note must cite its bill. If it names no bill number, send it back for a fixed copy — a credit that floats free of a bill can be applied to the wrong debt, by you or by the firm, and the tale will not tie out. With the bill in hand, check the note row by row: the rows it cuts are the rows you sent back or were charged wrong, at the prices the bill charged.
Then the sums: rows cut, plus the tax on them, give the note's total. That chain is the same one a bill must hold, and it fails for the same dull causes — a row missed, tax left whole. If your sums do not tie, the guide on why invoice totals don't add up runs the checks that find the gap, on notes as on bills.
Check the reason too. The note should say why, in brief, and the why should match your claim. A note that says “goodwill” for goods you sent back is a note whose sum may be a gift, not the price of the goods — and gifts can be withdrawn in a way fixes can not. If the why is wrong, get it put right on the paper while the trail is warm.
Last, the date and the firm's own number for the note. File both. A firm that can not find its own note by its number, six months on, is a firm whose credit you will chase with your copy or not at all. Your copy, with its number, is the note's life insurance.
Net it off: the three ways a credit gets used
If the bill is not yet paid, the path is plain: pay the bill minus the credit. Note both numbers on the pay and on the bill's record — “bill 1042, $264, less credit CN-88, $40; paid $224” — so the bank line, the bill, and the note tell one tale that any reader can close.
If the bill is paid, the credit rides forward: it comes off the next bill from that firm. This is where credits die. The next bill lands, a new hand pays it in full, and the credit sits in a drawer till the trail is cold. Guard it in the tracker: a line for the credit, in the firm's name, with its sum and date, that stays open till it is used. A good unpaid-bills list holds credits as first-class lines for just this reason — what a firm owes you sits next to what you owe them.
The third way is cash back: a refund. Ask for it when the credit is large, when you will not buy from the firm for a long while, or when the tie is ending. Some firms hold credits for a span — six months is a known span in payables offices — and then move to refund or lose the trail, so a credit you mean to spend late should be spent with that clock in mind. When the cash lands, match it to the note's number in your sheet and close the line.
Whichever way it goes, close the loop in words on both records: on the note, where it was used; on the bill or the pay, which note cut it. A credit with no “used” mark will be claimed twice one day, by an honest hand who found it in the file and took it for live. Marks are cheap. Double claims are not.
Credit notes in your books and tools
In your books, a credit note cuts the cost the bill raised. Post it against the same kind the bill used — goods, work, tax — so the kind sums stay true. A credit posted to a vague “misc” line leaves the true kind high and the year's sums wrong in a way no one can see till the tax file is built.
In Xero, credit notes are first-class: they come in with the bills and sit on the firm's account till you apply them. Our guide on how to upload supplier bills to Xero shows the bill path; the credit path rides with it — Xero's own import takes bills and credit notes in the same flow, each in its kind, so the firm's balance nets as you go.
In QuickBooks the tale is the same shape: enter the credit as a vendor credit, then let the next pay apply it, so the bill and the credit net in the tool, not in your head. In both tools the rule is one: the credit goes in as its own paper, tied to its bill — never as a quiet edit to the bill's sum. An edited bill has no tale. A bill with a credit tied to it has a whole one.
And keep the PDF. Convert the note for its row, the way you convert a bill with the converter — the number, the bill it cites, the sum, the tax — and file the note with the bill it fixes. The pair in one place is the unit your books stand on.
When the note stalls, shrinks, or never comes
You asked for a credit and the firm agreed — and no note lands. Chase it like a bill in reverse: by its facts. “On May 3 you agreed a credit of $40 on bill 1042 for the two cracked discs. I have no note yet.” A chase with dates and sums gets a note. A chase that says “still waiting on that credit” gets a shrug.
The note lands, but the sum is short — the firm cut the rows but not the ship fee, or priced the returned goods at a “restock” rate you never agreed. Query the gap at once, by the rows. Credits shrink in the dark; in the light, most firms make the sum whole, since the facts — your claim, their bill — are both on paper.
The firm goes quiet, or goes under. A credit from a firm that folds is worth what the firm's debts are worth, which may be nil. That is the hard case for holding big credits: a large credit is a loan to the firm. Spend big credits fast, or take them as cash. Small ones can ride; big ones should land.
Keep a cap in your head: if the open credits with one firm pass a sum you set — a week's buys, say — stop and cash them out before you buy more. The cap turns a fog risk into a rule, and rules are what keep small sums small.
The file: bill and note, side by side
File the note where the bill lives, with a name that ties them: the bill's name plus the note's number. In the sheet, the note's row cites the bill's number, and the bill's row grows a note: “credit CN-88, $40, used June 2.” Two cites, each way. Any reader can start at either paper and reach the other in one hop.
At year end, sweep the open credits. A list of credits asked, credits in hand, credits used — three counts that should tie. The sweep takes ten minutes and is part of the tax-time pack: a credit found in January is money; a credit found by your tax help is a fee; a credit never found is a gift to the firm.
Read the year's credits as a map, too. A firm whose bills spawn credits month after month is a firm with a picking, packing, or pricing flaw — and the map is your case at the next price talk. Credits are not just fixes. They are data on how your vendors run, written in their own hand.
Your next step
Think of the last fix a firm owed you. Is there a note? Where does it live, and is it marked used or open? Pull it now and give it its row and its file mate. Ten minutes, and the fog loses one credit for good. Keep the credit on the open list till the day it is used — how to track unpaid invoices in Excel shows the list that holds credits next to debts, where neither can go quiet.
Then set the rule on the pay-gate card: no credit lives in a drawer. Each gets checked, netted, filed with its bill, and swept at year end. A rule said once beats a hunt run yearly.
A credit note is money the firm has already agreed you should not pay. All that stands between that agree and your bank is a path with no fog on it. Keep the path clear, and the note does what it was sent to do.
Sources and further reading
- Accounts Payable Processes — A university payables office on credit memos: one must cite the original invoice number or the order number to be applied, and an unused credit is chased to a refund after six months.
- What kind of records should I keep — The IRS on purchase records: the papers behind a cost must show the payee, the sum, the date, and what it was for — the same facts a credit note must tie back to.