What is a Credit Note?
Also known as a credit memorandum or a credit memo, a credit note is a document that is issued by a vendor or supplier to a customer. The document is typically used to provide some sort of discount off the pricing normally extended to the customer, either by authorizing a cash rebate to that client or subtracting the discounted amount from the balance due on transactions that have not yet been invoiced to the client. The discount may be in the form of a percentage off those charges or an actual dollar amount, depending on the policies and procedures of the entity that is issuing the credit memo.
A credit note is sometimes used as an internal document to process discounts extended to a client as part of a promotional campaign. For example, the vendor may extend run a promotion that provides specific clients with a 5% discount on the next three orders placed. As those orders are placed, a credit note is generated for each of those orders, reflecting the standard pricing applied to the items ordered. The total amount due on the order is then reduced by the 5%, with both the original and the adjusted totals appearing on the order invoice. Typically, the reason for the credit is also documented on both the note and the invoice. This approach allows the customer to see how much was actually saved on that particular order.
There are situations in which a credit note is used to compensate clients for some sort of inconvenience incurred while using the services of a given company. For example, a teleconference company may choose to issue a credit note on the invoice for a specific conference call when the quality of that teleconference is impaired by factors that originated with the company providing the service. In this scenario, the conference provider will issue a credit note or memo that effectively writes off a portion or even all of the charges associated with the call. An invoice for the call is still printed, but reflects both the original charges and the amount of the credit, along with the adjusted balance due. Here, the goal is attempt to repair the damage done by the inferior service received by the client, motivating the customer to give the teleconference provider another try.
Use of a credit note is also important to the internal accounting process. By documenting any discounts that are issued for any purpose, it is possible for companies to determine how much revenue is lost each period as the result of those credits. This can be especially important since companies can track not only the totals but also the reasons for the credits. Should an analysis of the credit note activity for a period indicate that a recurring service error accounts for a significant amount of the credits issued, steps can be taken to correct the matter, ultimately saving the business a considerable amount of money.
Good explanation I have now found from this article.
There are some situations where a credit memo can be raised or need to be raised:
1. When seller received a specific number of order from a customer, seller can raise credit memo.
2. A seller can raise when he deliver inferior goods/services.
3. To find out the revenue a seller lost for the credit memos for future analysis. --Biplab S.
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