Credit Note: Its use, components and other important details

  • Updated on: 28 Dec 2023
  • Published on: 21 Dec 2023
Credit Note: Its use, components and other important details

Businesses issue a credit note under special circumstances that allow them to correct any discrepancies in bills and invoices. These include any errors in the amount or details of invoices or if a customer returns the product. Issuing credit notes for rectification is more convenient than reissuing new invoices. 

A credit note aids all GST-registered businesses in maintaining the account books without any discrepancies. It also allows adjusting the tax liability for the product returned. 

So, read on to know what is a credit note, its format, steps, procedure and more. 

What is a GST Credit Note?

Credit notes are documents issued by sellers to adjust the amount of goods supplied in the original invoice. Sellers or suppliers issue this tax invoice in acknowledgement of a debt invoice raised by their buyer. 

Sellers can use the credit memo to adjust the amount in future transactions instead of discarding the original invoice and creating a new one. This way, it becomes easier for them to track their transactions and maintain the balance in their books. 

Suppliers can also issue a credit note to amend the GST liability of the original invoice. In this case, it can also be referred to as a GST credit note. A credit note also reduces the customers’ liability since they will get a discount or refund in the future. 

To understand how a credit note works, here’s an example. Suppose you made a purchase worth ₹1 lakh, out of which ₹20,000 worth of products get damaged during the delivery. If you have already made the full payment for the goods, then you must ask for a refund. 

After the supplier reviews the invoice, they will issue a credit memo that promises to refund or adjust the amount in future purchases. So, when you buy again from the seller, you can get ₹20,000 off your billing amount. 

Also Read: What is GST? Important points to know

Why is a Credit Note Issued? 

Businesses can issue a credit invoice under Section 34(1) of the CGST Act 2017 to amend the tax liability of a tax invoice that has already been issued. Here are some instances where suppliers can issue a credit note: 

  • If the amount on the invoice was more than the payable amount
  • If the buyer returns the goods, in case of damage, pilferage or wrong item delivered
  • If the buyer is not satisfied with the quality and wants a refund
  • If the invoice did not account for discounts 
  • If any pending payments against the invoice are cancelled
  • If the buyer received less quantity than what is mentioned in the invoice

GST Credit Note Format

According to the Harmonized System Nomenclature Service Accounting (HSN SAC) codes, a credit note should include the following details: 

  • Name of the business
  • Supplier and buyer address and GSTIN
  • Nature and type of document
  • Serial number and date
  • Quantity, rate amount and tax applied on the goods
  • Net taxable amount
  • Recipient personal details 
  • Supplier’s signature

Steps to Generate a Credit Note

Now that you know what is a GST credit note and its components, here are the steps to create them: 

  • Step 1: Identify the error or correction required
  • Step 2: Choose a credit memo template 
  • Step 3: Add your business logo and original invoice reference number
  • Step 4: Add date and unique credit memo identification number 
  • Step 5: Add goods value, quantity, description and other details from the original memo
  • Step 6: Deduct the value of the goods from the original amount and calculate the new amount 
  • Step 7: Add the GSTIN and save the invoice in PDF 

You can print the invoice or send it as a soft copy to the customer. 

Also Read: Impact of GST on Personal Loans

Credit Note VS. Debit Note

While a credit note is a tax invoice issued by the seller, the customer must also generate an invoice to request a refund. This invoice, known as a debit note, includes the amount that should be debited from the supplier’s account and the reason for this request. 

With these facts in mind, you can maintain your books for timely and accurate tax filing. Enterprises must issue a credit note before 30th September following the year in which the supply was made or before the annual return filing deadline when filing annual returns. Such documents help you maintain your balance sheet and monitor the cash flow, which is crucial for a business to run smoothly. 

To maintain your cash flow, you can get a personal loan that comes with no end-use restrictions and easily manage your business needs. You can apply for a Fibe  Personal Loan and get up to ₹5 lakhs in just 2 minutes at affordable rates and flexible tenures. Download our Personal Loan App or register on the website to apply online with minimal documentation. 

FAQs on Credit Note

How do you write a credit note?

To write a credit note, you can download a template and customise the details with your company and invoice.

What is a credit note in short form?

Since it is also called a credit memorandum, its short form is ‘credit memo’. 

What is a credit note PDF?

It is a soft copy of the credit invoice issued by the supplier. 

Who gives a credit note?

The seller or supplier issues the credit memo or note to the buyer to make amendments to the original invoice. 

What is a credit note on the balance sheet?

In double-entry bookkeeping, sellers will debit the credit memo under revenues but credit it in the buyer’s account or accounts receivable.


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