Invoice, credit note and statement: what each one does

A credit sale is a sale where the customer pays later. Four documents carry the money side of it.

Invoice

The seller's request for payment. It lists what was sold, the net amount, the VAT and the gross amount the customer must pay.

Credit note

The opposite of an invoice. It reduces what the customer owes. It is sent when goods are returned, when goods arrive damaged, or when the invoice charged too much.

Statement of account

A list sent by the seller at the end of a period, such as a month. It shows the invoices, credit notes and payments on one customer's account, and the balance owed.

Remittance advice

A list sent by the customer with a payment. It says which invoices and credit notes the payment covers.

One document has two names. To the seller it is a sales invoice. To the buyer it is a purchase invoice.

Three more documents come before the invoice: the quotation, the purchase order and the delivery note. They set out the price, the order and what arrived.

Only some documents change what is owed. Those are the ones that go into the books.

In the seller's books an invoice is a debit to Trade receivables for the gross amount, a credit to Sales for the net amount and a credit to VAT.

A credit note is that entry turned round. Sales returns is debited with the net amount, VAT is debited, and Trade receivables is credited with the gross amount.

A statement is a reminder, not a new charge. Nothing on it is new, so it is not entered.

The documents of one credit sale follow each other in this order.

1. The seller sends a quotation: the price, offered before anything is agreed.
2. The buyer sends a purchase order: the written order.
3. The goods go out with a delivery note, which is signed when they arrive.
4. The seller sends the invoice. The sale reaches the books now, not when the goods were delivered.
5. If something is wrong, the seller sends a credit note. An invoice is never rubbed out or changed.
6. At the end of the period the seller sends a statement of account.
7. The buyer checks the statement, pays, and sends a remittance advice with the payment.

The seller matches the payment to the invoices on the remittance advice. Once a payment is matched, those invoices are no longer outstanding.

Redcliff Signs sells menu boards to The Bluebell Tearoom on credit. On 1 April the tearoom owes £186.00 from March.

On 7 April Redcliff sends invoice 562. The net amount is £340.00 and the VAT shown is £68.00, so the gross amount is £408.00.

One board arrives cracked. On 14 April Redcliff sends credit note 31, with a net amount of £85.00 and VAT of £17.00. That is £102.00 in all.

On 20 April the tearoom pays the £186.00 it owed from March. At the end of the month Redcliff sends this statement.

The invoice adds to the balance. The credit note and the payment take away from it. The tearoom owes £306.00 at the end of April.

In May the tearoom pays £306.00. Its remittance advice lists invoice 562 for £408.00, less credit note 31 for £102.00. Together the credit note and the payment clear the invoice in full.

• Changing or deleting an invoice that is wrong. It stays as it is, and a credit note corrects it.
• Entering a statement in the books as if it were a new charge. Every line on it has been entered already.
• Recording a sale from the delivery note or the order. The sale reaches the books when the invoice is raised.
• Leaving the VAT off a credit note. It carries VAT in the same way as the invoice it corrects.
• Paying an invoice in full when a credit note has been issued against it. That overpays by the amount of the credit note.
• Paying from a statement without checking it. A difference is queried with the seller before anything is paid.

• The seller's own record of the customer shows the same closing balance as the statement.
• Each balance on the statement is the one before it, plus an invoice or less a credit note or a payment.
• The buyer's own records show every invoice and credit note that is on the statement, and nothing more.
• The total of the remittance advice is the same as the payment.

If the buyer's records and the statement differ, find the document that only one of them has. Query it first, and pay after.