What is the Journal Entry for Credit Note Received from Supplier?
Credit Note Definition
A credit note is a document issued by a seller to a buyer which represents a reduction in the amount owed.
Typically, there are three common reasons that a credit note would be issued:
- Returns
- Discounts
- Invoice Corrections
It is important to note that the journal entries for credits note will differ, dependant on the whether it is being issued by the seller, or received by the buyer.
Effectively, when a credit note is issued by the seller, it acts as an acknowledgment for a decrease in accounts receivable.
Conversely, when a credit note is received by the buyer, it acts as an acknowledgment for a decrease in accounts payable.
We will look at the journal entries for a credit note from both points of view.
Journal Entry for a Credit Note Issued by Seller
The journal entries depend on the reason that the credit note is being issued:
Returning Goods
The buyer may not have been happy with the quality of the products sent by the seller, and wishes to return these items.
Therefore, the seller may issue a credit note once they receive the returned goods.
In this instance, the journal entry involves debiting the Sales Returns account (to increase it) and crediting the Accounts Receivable account (to decrease it).
Sales Returns | Debit |
Accounts Receivable | Credit |
Discounts
The seller may provide the buyer with a discount on their order, maybe as a gesture of goodwill or a reward for their loyalty.
In this example, the journal entry involves debiting the Sales Discount account (to increase it) and crediting the Accounts Receivable account (to decrease it).
Sales Discount | Debit |
Accounts Receivable | Credit |
Error Corrections
The seller may have incorrectly invoiced the buyer.
For example, the buyer may have purchased 100 units, but they were accidently invoiced for 200 in error.
Therefore, the seller will issue a credit note to correct this, and reduce the value of the original invoice.
This would involve a journal to debiting the Sales Revenue account (to decrease it) and crediting the Accounts Receivable account (to decrease it).
Sales Revenue | Debit |
Accounts Receivable | Credit |
Journal Entry for a Credit Note Received by Buyer
The journal entry for a credit note from the buyers point of view is usually much more straightforward.
This just involves reducing the Accounts Payable balance (ie the amount owed to the seller) and also reducing the Purchases expense account (ie the amount of ‘spend’ from the business).
Purchases | Credit |
Accounts Payable | Debit |