Chapter 7

Credit Notes, Refunds, and Discounts

 CREDIT NOTE
A credit note is also known as a credit memo, which is short for "credit memorandum."
This is a commercial document that the supplier produces for the customer to notify the
customer that a credit is being applied to the customer for various reasons.

The reasons normally include the following:

• the customer returned the goods or rejected the services for any number of reasons
• the goods were damaged in some way, usually during transit
• there was a mistake in the price on the original invoice
• the customer overpaid the original invoice
Chapter 7: Credit Notes and Refunds on Sales

When a sale is made to a customer on account, an

entry is made in the Sales Journal as usual.

• In this case, we see a sale to Harvey Gray.

Chapter 7: Credit Notes on Sales

If Harvey Gray returns some of the goods because they are

unwanted or damaged

• A credit note would be issued to the customer, and

• A negative entry would be recorded in the Sales Journal.
Chapter 7: Credit Notes on Sales

• The date and the customer’s name are entered as usual.

• The credit note number (if any) is entered.
• All amounts are entered in brackets to indicate they are
negative numbers.
Chapter 7: Credit Notes on Sales

• When columns are totalled, negative amounts are

subtracted from the positive amounts.
• Column totals are posted as usual at month-end.
• The negative invoice is posted to Gray’s account as a
credit, rather than a debit.

147

(104) (401) (206) (207)

Chapter 7: Credit Notes on Sales

Sales Returns & Allowances

• A contra-revenue account for recording credit notes for

unwanted or damaged merchandise returned by the
customer or for price allowances when the customer
chooses to keep the damaged goods
Chapter 7: Credit Notes on Sales

Instead of recording the credit note in the Sales Journal, it

can be recorded in the General Journal.

• Sales Returns & Allowances is debited instead of Sales.

Chapter 7: Credit Notes on Sales

• The entry for the credit note is basically the reverse of

the original sale entry.
Chapter 7: Refunds on Sales

If a cash customer returns goods for a refund, the money is

usually paid out of the cash register.

• An entry is made in the Cash Receipts Journal as a

deduction from the day’s sales.

• Amounts for refunds must be in brackets.

• The debit to Bank is the day’s sales minus the refunds.

Chapter 7: Refunds on Sales

If the refund is too large to be paid out of the cash register,

a cheque is issued and an entry is made in the Cash
Payments Journal.

• Notice there are no special columns for this entry, so all

amounts are entered in the General Ledger column.
Chapter 7: Sales Discounts

Terms of Sale

• Net 30 days, n/30 = invoice must be paid within 30 days

• 2/10, n/30 = 2% discount if paid within the first 10 days;

otherwise, the full amount must be paid within 30 days

• 3/10, 1/20, n/30 = 3% discount if paid within the first 10 days;

1% discount if paid after the 10th day but before the 20th day;
otherwise, the full amount must be paid by the 30th day

• Discounts are typically based on the pre-tax value of the invoice.

Chapter 7: Sales Discounts

Sales Discounts

• A contra-revenue account for discounts allowed to

customers for early payment
Chapter 7: Sales Discounts

Example:

On August 6, merchandise was sold to Jack Harper for $500

plus taxes, for a total of $565 on Sales Invoice #16. The
terms were 2/10, n/30.

• The discount is 2% if paid before August 16.

• The discount is based on the value before taxes ($500).

$500×2% = $10
Chapter 7: Sales Discounts

Sales Discounts is the difference between the amount of

the invoice and the amount actually paid.

Here is the same entry in the Cash Receipts Journal:

Chapter 7: Sales Discounts

In Harper’s account, the discount appears only as a

notation in the Memo column.
Chapter 7: Credit Notes on Purchases

Purchases on account are typically recorded in the

Purchase Journal.

Therefore, credit notes can also be recorded in the

Purchase Journal, as negative entries.
Chapter 7: Credit Notes on Purchases

Example 1:

Received a credit note from Red River Co. for the return of
merchandise that was bought on August 2nd.

• The amounts of the credit note are entered in brackets.

Chapter 7: Credit Notes on Purchases

Example 2:

Received a credit note from Steele Office Store for the

return of office equipment bought on August 23rd.

• Again, the amounts of the credit note are entered in brackets.

Notice the credit note is

charged to the same
account as the original
purchase.
Chapter 7: Credit Notes on Purchases

Purchase Returns & Allowances

• A contra-expense (negative expense) account to

record credit notes received on unwanted or damage
merchandise.
Chapter 7: Credit Notes on Purchases

• As an alternative to recording a credit note as a

negative entry in the Purchase Journal, the credit
note can be charged to Purchase Returns &
Allowances in the General Journal.
Chapter 7: Credit Notes on Purchases

Example:

On August 2nd, merchandise was bought on account

from Red River Co. The invoice was recorded as usual
in the Purchase Journal.

Then on August 8th, a credit note was received for

damaged goods in that shipment.
Chapter 7: Credit Notes on Purchases

• The credit note is charged to Purchase Returns &

Allowances rather than to the original account,
Purchases.
Chapter 7: Refunds on Purchases

• Refunds received from suppliers are entered in the

Cash Receipts Journal.
• Refunds on merchandise are charged directly back to Purchases
or to Purchase Returns & Allowances.
• Refunds on non-merchandise items are charged to the original
account.
Chapter 7: Purchase Discounts

Purchase Discounts
• A contra-expense account for discounts taken on
merchandise paid for within the discount period.
• Purchase discounts are handled in the same way
as sales discounts.
Chapter 7: Purchase Discounts

• In the journal entry, Purchase Discounts accounts for the

difference between the amount of the invoice and the
amount actually paid.

• Discounts are typically based on the pre-tax value of the

invoice.
Chapter 7: Purchase Discounts

• The Cash Payments Journal has a special column for

Purchase Discounts.
Chapter 7: Discounts on Non-merchandise Items

• Discounts on non-merchandise items are charged to the

asset or expense item that was purchased, not to
Purchase Discounts.

The purchase
of a computer.

The discount is
deducted from
Office Equipment.
Chapter 7: Cash on Delivery (COD)

Cash on Delivery
• Goods ordered on a COD basis are treated as cash
purchases.
• The transaction is recorded into the Cash Payments
Journal when the invoice and the goods arrive at the
door.
Chapter 7: Credit Notes, Refunds, and Discounts

End of Chapter 7