How do I deal with supplier credit notes in Xero?

Construction business owner asks:

How do I deal with supplier credit notes in Xero?

Acumenica answers:

In Xero, dealing with purchase credit notes (also called supplier credit notes) involves recording the credit from a supplier due to returned goods, overpayment, or other reasons. Here's how you manage purchase credit notes in Xero:

Steps to Deal with Purchase Credit Notes in Xero:

1. Create a Credit Note:

   • Go to the Business menu and click on Bills to pay.
   • Find the New Credit Note button (or sometimes, this is found under + New, then Credit Note).
   • Enter the details of the credit note, such as the supplier's name, the date, reference number (if any), and the amount. Ensure you enter the correct account codes for the line items, as these will affect your accounting records.

2. Allocate the Credit Note:

   • After creating the credit note, you can either:
     • Apply it to an existing bill: If you have outstanding bills from the supplier, you can allocate the credit note to reduce the amount payable.
     • Apply it as a refund: If the supplier refunded the money directly to your bank account, you'll match the credit note to the refund transaction in your bank reconciliation.
     • Leave it as a credit for future bills: The credit note will remain as a credit that you can apply to future bills from the supplier.

3. Apply Credit Note to an Existing Bill:

   • Go to Business > Bills to pay.
   • Find the outstanding bill from the supplier.
   • Click on Options next to the bill and select Add Credit Note.
   • Choose the appropriate credit note from the list and apply it to the bill. Xero will reduce the amount of the bill by the value of the credit note.

4. Record a Refund from a Supplier:

   • If the supplier has refunded the credit directly to your bank account, reconcile the bank transaction against the credit note:
     • Go to the Accounting > Bank accounts menu and click on the relevant bank account.
     • In the Reconcile tab, find the refund transaction.
     • Click Match, then select Credit Note.
     • Choose the appropriate credit note, and Xero will match the refund to it.

5. Review and Reconcile:

   • Check your reports and balances to ensure the credit note has been correctly applied and that the relevant accounts reflect the changes.

Key Points to Remember:

• Credit Note References: Always use the correct supplier and original bill details to ensure that the credit is accurately applied to the right transaction.
• Account Codes: Make sure the account codes in the credit note match those in the original bill to avoid discrepancies in your reports.
• Partial Credit Notes: If the credit note only covers part of a bill, Xero will allow you to apply the remaining balance to future transactions.

Managing credit notes properly ensures your accounts are accurate, reflecting any returned items or overpayments, and preventing discrepancies in supplier payments.