Page 12 Chapter 2

CHAPTER 2
Selling Goods and Services

First of all the credit note is proof that the original invoice does not need paying in full.
Dawson Supplies may have forgotten that the invoice had been reduced in their books and
they may try to pursue payment. The credit note is proof that Dawson Supplies had agreed
the reduction.

Secondly, both companies will have recorded the invoice in their books. Unlike cash sales,
credit sales are not paid for there and then so a cash refund is not an option. Simply crossing
out an entry is also not an option. It is frowned upon to erase entries in books as this can
often lead to fraud and misleading figures. A credit note is proof that the credit has been
approved and taken place and it is also a record that the original sale was made but there
was something wrong with it.

The calculation takes exactly the same format as the original invoice. It is common sense to
still take off the trade discount as it is the reduced amount which was charged and it should
be the same reduced amount which is given back.

The original invoice calculated the VAT on the reduced amount. If you don’t subsequently
take the discount into account when calculating the Credit Note then you could finish up
giving back more than you charged in the first place.

Take the invoice we prepared earlier in this chapter. Let’s suppose that R Patel wants to
send it all back. The calculation on the credit note would be (£3375.00 + 20%) = (£3375.00 +
675.00) = £4050.00.

Now let us see the calculation for the return of the two rolls.

Calculating a Credit Note

1. Calculate the total price before trade discount
2 x £75.00 = £150.00

2. Calculate the trade discount
£150.00 x 10% (or 10/100) = £15.00

3. Calculate the net price
£150.00 ‐ £15.00 = £135.00

4. Calculate the VAT on the reduced amount
£135.00 x 20% (or 20/100) = £27.00

5. Calculate the total of the credit note.
£135.00 + £27.00 = £162.00

The credit note itself often looks very similar to the Invoice. Some companies try to make
the distinction between an Invoice and a Credit Note more obvious by printing at least some
of the credit note in red.

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