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HomeRevenueRevenue recognitionExamples

Credit note examples

Learn about revenue recognition with credit note examples.

Unless stated otherwise, these credit note examples assume that revenue recognition takes place on a per-day basis.

Credit note before a payment

A pre-paid credit note is issued before the customer makes a payment or before the invoice is fully paid. It is used to adjust the amount the customer owes or to provide a discount upfront. Here’s an example:

In this example, a customer starts a subscription for a 3 month period on January 1 at 00:00:00 UTC that costs 120 USD. Before a payment is received, you offer a pre-payment credit note of 30 USD that is applied to the customer balance. This is treated like an upfront discount and reduces your overall invoice to 90 USD. The invoice is then paid in February for 90 USD. Your summary for March would look something like this:

AccountStartingJan 2024Feb 2024Mar 2024Ending
AccountsReceivable0.00+90.00-90.000.00
Cash0.00+90.0090.00
Revenue0.00+31.00+28.00+31.0090.00
DeferredRevenue0.00+59.00-28.00-31.000.00

Credit note after a payment

You can use a refund, a customer credit, or an out-of-band credit to issue a credit note to a customer after they’ve made a payment.

In this example, a customer starts a subscription for a 3 month period on January 1 at 00:00:00 UTC that costs 90 USD. The subscription generates an invoice and the customer pays it immediately. On February 1, you issue a credit note of 45 USD where you: refund 15 USD; credit 10 USD to the customer balance; and credit 20 USD to an external customer balance (an out-of-band credit). Your summary for March would like something like this:

AccountJan 2024Feb 2024Mar 2024
Cash+90.00-15.00
Revenue+31.00+14.00+15.50
DeferredRevenue+59.00-43.50-15.50
Refunds+5.10
CreditNotes+10.40
CustomerBalance+10.00
ExternalCustomerBalance+20.00

Credit note without line items

This example uses the following assumptions:

  • On January 1 at 00:00:00 UTC, a customer starts a 6 month subscription that costs 181 USD.
  • The subscription generates an invoice.
  • The invoice finalizes, but the customer hasn’t paid yet.
  • On February 1, you issue a credit note of 90.50 USD.

When the credit note is issued:

  • The accounts receivable account is reduced according to the credit note’s amount.
  • Recognized revenue is offset by contra revenue proportionally in the credit notes account.
  • Deferred revenue from the subscription that hasn’t been recognized is reduced proportionally to the credit note amount.

If you viewed the summary after March ends, it might look something like this:

AccountStartingJan 2024Feb 2024Mar 2024Ending Mar 2024
AccountsReceivable0.00+181.00-90.5090.50
Revenue0.00+31.00+14.00+15.5060.50
DeferredRevenue0.00+150.00-89.00-15.500.00
CreditNotes0.00+15.5015.50

When the credit note is voided on May 3:

  • Reverses the credit notes account.
  • Increases accounts receivable back to the original invoice due amount.
  • Recognizes the reduced revenue in May instead of February, March, and April.
  • Reinstates the reduced deferred revenue in May.

The summary after June end might look something like:

AccountStartingJan 2024Feb 2024Mar 2024Apr 2024May 2024Jun 2024Ending
AccountsReceivable0.00+181.00-90.50+90.50181.00
Revenue0.00+31.00+14.00+15.50+15.00+75.50+30.00181.00
DeferredRevenue0.00+150.00-89.00-15.50-15.00-0.50-30.000.00
CreditNotes0.00+15.50-15.5015.50

A credit note without line items doesn’t match with a specific invoice line item. Rather, the amount of the credit note is divided proportionally among the invoice line items.

Credit note with line items

A credit note with line items works similarly to a credit note without line items, except that a credit note line item is used for adjusting the revenue and other accounts for a corresponding invoice line item.

Credit note with negative line items

Adjustments to accounts for a credit note with negative line items are the reverse of those for a credit note with positive line items.

Learn how to credit negative invoice line items in the Dashboard or programmatically with the API.

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