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Create and apply credit notes or delayed credits in QuickBooks Online

by Intuit•70• Updated 2 months ago

Learn how and when to give a credit note or delayed credit to customers.

Instead of a refund, some customers prefer getting a credit note they can use to reduce the balance on their next invoice.

There are a few ways to handle credit notes in QuickBooks. You can create a credit note to immediately reduce a customer's current balance. Or you can enter a delayed credit so they can use it in the future.

Here's more about the differences and how to apply them to customer transactions.

Note: If your customer simply wants a refund, here's how to return your customer's payment.

In QuickBooks, you can give credit using a credit note or delayed credit. Here are the key differences:

Credit note

  • If your customer wants to immediately reduce their current open balance, use a credit note.
  • Your customer can use their credit note as payment for an invoice. They can use all of their credit notes or a portion of it.
  • You can apply a credit note when recording payment for a customer’s invoice.
  • Credit notes impact sales reports, even if you don't apply them to invoices.

Delayed credit

  • If you want to track a customer's credit for future use, and they don't want it to immediately affect their current open balance, use a delayed credit.
  • Your customer can use their delayed credit to reduce the balance of an invoice.
  • You can add delayed credits to future invoices as a line item.
  • Unlike credit notes, delayed credits don't impact sales reports until you apply them to invoices.

Step 1: Turn on or turn off Automatically apply credits

Note: Automatically apply credits only affects the next invoice created. It does not affect existing invoices in Receive Payment.

To turn on the credit note auto-apply feature:

  1. Go to Settings Settings gear icon. and select Account and settings.
  2. Select the Advanced tab.
  3. Select Edit ✎ in the Automation section.
  4. Turn on Automatically apply credits if you want to automatically apply credits to customer balances or open invoices. Turn it off if you want to decide which open invoices you want to apply credit notes to.
  5. Select Save, then Done.

Turn on auto-apply credits if you want to automatically apply credits to the oldest open invoices for the same customer. Here’s what'll happen if it’s on:

  • If you have older open invoices, QuickBooks applies the credit to the oldest open invoice. If none, QuickBooks applies the credit to the next invoice. 
  • If the credit matches the amount on the invoice, the credit note and invoice will show as Closed. If the credit is less than the amount of the invoice, the credit note will show as Closed, and the invoice will show as Partial.
  • If the credit is more than the amount of the oldest open invoice, QuickBooks applies the remainder to the next oldest open invoice. If there’s no more open invoices, the status of the credit note will show as Unapplied.
  • If you create credit and your customer owes nothing, they’ll have a negative balance.

Turn off auto-apply credits if you create a lot of invoices and credit notes for customers. Also, if you need to apply specific credit notes to specific invoices. Here’s what'll happen if it’s off:

  • When you enter a credit, QuickBooks won’t apply it to any open invoices.
  • When you receive a customer payment using Receive Payment, it has a Credits section (if the customer has credits). You can then choose when to apply credits and to which invoices.
  • If you don’t link any credits, the Customer Balance Detail report shows that both the invoice and the credit note have open balances. They also show as Open on the Customer and Sales transaction pages.
  1. Select the invoice that has the credits applied. 
  2. Select the blue hyperlink of the credit applied, then select the date. The payment transaction will open.
  3. Select More, then Delete, then select Yes to confirm.

If you want to transfer credit from one customer to another, create a journal entry, then apply the credit.

Step 2: Create a credit note

  1. Select + New.
  2. Select Credit note.
  3. From the Customer dropdown, select the customer's name.
  4. Enter the credit note details, such as the date and the amount.
    Tip: You can create a custom credit service item so you can quickly add it to credit notes as a single line item.
  5. When you're done, select Save and close.

Note: If your customer has returned stock and you wish to update your quantity on hand, input the product as a line item within the credit note.

Step 3: Apply the credit note to an invoice

If you turn on the auto-apply credits, QuickBooks will apply the credit for you. If you turn it off, here's how to manually apply a credit note to an invoice.

  1. Select + New.
  2. Select Receive payment.
  3. From the Customer dropdown, select the customer.
  4. In the Outstanding Transactions section, select the open invoice you want to apply the credit note to.
  5. In the Credits section, select the credit notes you want to apply.
    Note: You won't see the credits section if you have not created the credit note.
  6. For the open invoice in the Payment column, enter how much of the credit you want to apply.
  7. Leave the Payment method, Reference no, Deposit to, and Amount received fields blank.
  8. Fill out the rest of the form, including the Payment date.
  9. Make sure the total is correct after applying the credit note.
  10. When you're done, select Save and close.

Step 1: Create a delayed credit

  1. Select + New.
  2. Select Delayed credit.
  3. From the Customer dropdown, select the customer's name.
  4. Enter the details, such as the date and the amount.
    Tip: You can create a custom credit service item so you can quickly add it to delayed credits as a single line item.
  5. When you're done, select Save and close.

This saves the delayed credit. You can choose to apply it the next time you invoice the customer.

Step 2: Apply the delayed credit to an invoice

Keep in mind that adding a delayed credit to an invoice from a prior accounting period will affect that period's balances.

  1. Select + New.
  2. Select Invoice.
  3. From the Customer dropdown, select the customer. This opens a window with all open transactions for the customer, including invoices and delayed credits.
    Note: If you don't see this, select the small arrow next to the invoice Balance Due.
  4. Find the delayed credit and select Add. This adds the credit as a line item to the invoice.
  5. Fill out the rest of the invoice as needed.
  6. When you're done, select Save and close.

Related articles:

Credit note customisation

Any customisations applied to the Standard template will be picked up by the credit note. To customise a credit note, edit the Standard template according to your needs.

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