A customer returns something, disputes a price or gets a discount after delivery. What happens next decides whether your books stay accurate. Some businesses delete the invoice, some give cash from the till with no record and some post a negative sale with no explanation. All three create trouble with VAT, stock and customer balances. A clear process makes the right path obvious to the sales team and the accountant.
Credit note, refund or replacement?
| Situation | Usual treatment |
|---|---|
| Goods returned, customer has an unpaid invoice | Credit note reduces the amount owed |
| Goods returned, customer already paid | Credit note, then either a refund payment or a balance kept on account |
| Price correction or discount after invoicing | Credit note for the difference, with the reason |
| Faulty item swapped for the same item | Replacement against the original sale, with the faulty unit recorded |
| Service not delivered in full | Credit note for the part not performed |
A credit note is the document that adjusts the sale. A refund is the movement of money. Keep them separate so each has its own record and approval.
What the document should show
A credit note should refer to the original tax invoice, state the reason, list the items or amounts being credited and show the VAT adjustment. Your adviser can confirm the exact content and timing required for your case under the VAT rules. See tax invoice, proforma and quotation for how these documents relate. Never alter or delete an issued invoice; create a correcting document instead.
The return workflow
- Request: the customer or salesperson records the return with invoice number, items, quantity and reason.
- Approval: a manager approves, applying your policy on time limits, condition and restocking charges.
- Receive and inspect: returned goods are checked and moved to saleable stock, repair or scrap, so inventory value stays honest.
- Credit note: generated from the original invoice so quantities and prices cannot exceed what was sold.
- Settle: apply the credit against open invoices or issue a refund by the original payment method, with approval and a reference.
Controls worth adding
- Limit who can create credit notes, and require a second approval above a set amount.
- Report credit notes by customer, salesperson and reason each month. Patterns reveal quality problems and sometimes misuse.
- Flag refunds to a different bank account or person than the payer.
- Reconcile the VAT effect of credit notes in the return, see the VAT checklist.
The delivery side of returns is covered in order to delivery. If you would like this flow in your software, send us your current routine.