The customer credit note journal entries below act as a quick reference, and set out the most commonly encountered situations when dealing with the double entry posting of credit notes.
A credit note is an accounting source document. It is a document issued by a seller to a buyer that reduces the amount owed by the buyer for goods or services. This can occur for a variety of reasons, such as returned goods or over-billing.
The following are examples of credit note journal entries. In each case the credit note journal entries show the debit and credit account together with a brief narrative. For a fuller explanation of journal entries, view our examples section.
Typical Journal Entries
Credit Note Journal Entry – Incorrect Billing
| Account | Debit | Credit |
|---|---|---|
| Revenue | XXX | |
| Account receivable (against invoice) | XXX |
The sales revenue account is reduced to correct the error in billing. The accounts receivable account is reduced to reflect the fact that the customer owes less than the original invoice amount.
Credit Note Journal Entry – Goods Returned
| Account | Debit | Credit |
|---|---|---|
| Sales returns and allowances | XXX | |
| Accounts receivable | XXX |
The sales returns and allowances account is a contra revenue account that is used to record the reduction in revenue resulting from returned goods. The accounts receivable account is reduced to reflect the fact that the customer no longer owes the full amount of the original invoice.
Credit Note Journal Entry Discount Allowed
| Account | Debit | Credit |
|---|---|---|
| Discount allowed | XXX | |
| Accounts receivable | XXX |
The discounts allowed account is a contra revenue account that is used to record the reduction in revenue resulting from the discount given to the customer. The accounts receivable account is reduced to reflect the fact that the customer no longer owes the full amount of the original invoice.
Conclusion
In conclusion, credit notes are an important tool for adjusting accounts receivable in accounting. The above journal entries show the different scenarios that may require the issuance of a credit note and the accounting treatment for each scenario.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.