An invoice is issued to a customer for 900, and before paying the invoice, the customer notices a mistake resulting in a new invoice total of 800. To correct the mistake, the business issues a customer credit note for the difference of 100 (900-800), so that the balance on the customers account for the invoice is reduced to 800, the amount which needs to be paid.
The double entry bookkeeping journal entry to show the credit note issued is as follows:
Customer Credit Note Journal Entry
The accounting records will show the following bookkeeping transaction entries to record the customer credit note:
|Accounts Receivable (Customer)||100|
Customer Credit Note Journal Entry Explained
A credit note can be viewed as a negative invoice and the bookkeeping entries in effect reverse the original invoice entries.
The original invoice would have been a credit of 900 to revenue, the debit entry of 100 reduces the revenue to the correct amount of 800.
The original invoice amount of 900 was included on the customers accounts receivable as an amount outstanding from the customer. The credit entry to the account reduces the balance outstanding for this invoice by 100 to the correct amount of 800.
Accounting Equation – Customer Credit Note
The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities of the business This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.
In this case an asset account (accounts receivable) decreases, representing a reduction in the money owed by the customer to the business, this decrease is balanced by the reduction in owners equity. The debit to revenue in the income statement, reduces the profit which reduces the retained earnings and therefore the owners equity in the business.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. 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 BSc from Loughborough University.