Credit Note Meaning

A credit note is a term used in the context of buyer and seller of goods; it refers to that note by which one party informs the other party that his or her account is credited in the books of account of the party making the credit note. It can be better understood with the help of an example suppose buyer A has purchased goods from seller B worth $10000 and out of this $500 worth of goods are found missing in the consignment than B will make a credit note of $500 and will send it to A informing him or her of the amount which B has to pay to A.

Credit note can be made in the following cases –

  1. When the buyers has been overcharged by the seller for the goods sold then the seller will make the credit note in favor of buyer for the difference by which the seller has overcharged the buyer, so for example if the seller has sold goods worth $5000 but has made charged from the buyer $5500 than seller will make credit note of $500 in favor of the buyer of the goods.
  2. When the buyer of the goods returns the goods then also seller will be making credit note thereby acknowledging the receipt of returned goods.
  3. When buyer of the goods has paid less for the goods purchased from the seller than buyer will make credit note in favor of the seller of the goods, so in the above example if the buyer has paid $4500 instead of $5000 then buyer will make credit note of $500 in favor of seller of goods.

As one can see from the above that credit note is a way of acknowledgment on the part of seller or buyer for the amount that is to be paid to the other party.

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