An invoice increases the amount a buyer owes and a credit note decreases it. Both come from the seller, and each shows the net amount after trade discount.
This lesson belongs to source evidence and original entry. It builds on choosing the right source document.
What does each document do to the balance?
Picture a running tab at a shop. An invoice adds a line to the tab. A credit note crosses a line off, because the shop accepts that you should not pay for those goods.
For the buyer, the tab is a payable: an amount owed to a supplier. For the seller, the same tab is a receivable: an amount a customer owes.
| Document | Effect on amount owed | Buyer’s book | Seller’s book |
|---|---|---|---|
| Invoice | Increases | Purchases day book | Sales day book |
| Credit note | Decreases | Purchases returns book | Sales returns book |
How do you work out the amounts?
- Find the quantity and unit price on the document.
- Multiply to get the list total.
- Take off trade discount, written as a percentage of the list total.
- Enter the net figure. Only the net figure goes into the books.
- Update the running balance: add invoices, subtract credit notes.
The percentage-base explorer is useful for checking that a discount is applied to the correct starting amount.
Worked example
Bintang Paper Supplies sells to Aina Stationery. Trade discount is 10% on all sales.
Invoice 2041: 40 reams at RM12.
- List total: 40 × 12 = RM480
- Trade discount: 10% of 480 = RM48
- Net invoice: 480 − 48 = RM432
Credit note 305: 5 damaged reams returned at RM12.
- List total: 5 × 12 = RM60
- Trade discount: 10% of 60 = RM6
- Net credit note: 60 − 6 = RM54
Amount now owed by Aina: 432 − 54 = RM378.
Cross-check a second way: Aina effectively kept 35 reams. Then 35 × 12 = RM420, and 10% of 420 is RM42, so 420 − 42 = RM378. Both routes agree.
The mistake to watch for
A common slip is to treat the credit note as if it increases the balance, because it arrives on the same sort of form.
Mistaken balance: 432 + 54 = RM486 owed.
The student saw a second document from Bintang and added it. A credit note reduces what is owed.
Correction: before adding or subtracting, ask “does this paper charge me or release me?” An invoice charges. A credit note releases. A second related mistake is to ignore the discount and subtract RM60, giving RM372, which is RM6 too low.
Check yourself
Try these, then open each answer.
1. An invoice shows 25 boxes of pens at RM14 each, less 20% trade discount. What net amount is owed?
Show answer
List total 25 × 14 = 350. Discount 20% of 350 = 70. Net = 350 − 70 = RM280.
2. Of those boxes, 5 are returned and a credit note is issued on the same terms. What is the credit note, and what is now owed?
Show answer
List 5 × 14 = 70. Discount 20% of 70 = 14. Credit note = 70 − 14 = RM56. Owed = 280 − 56 = RM224.
Check: 20 boxes × 14 = 280, less 20% (56) = 224.
3. Which of the invoice and the credit note is entered in the sales returns book by the seller?
Show answer
The credit note. The seller copy of a credit note is recorded in the sales returns book. The invoice goes in the sales day book.
Where this leads next
Next, put an invoice into the books with recording a credit purchase. Then see how credit notes are handled in handling a returned item.
If discount percentages or directions of change keep catching you out, our teachers can work on that with you in online one-to-one Accounting tuition.