Which statement about credit notes is correct?

• A. It reduces the amount a customer owes.
• B. It increases the amount a customer owes.
• C. It has no effect on liabilities.
• D. It records cash receipts.

Answer: (A)

A credit note is a document issued by the seller to record a reduction in what the customer owes. When it’s issued, the amount the customer owes (accounts receivable) is decreased, and revenue is reduced through a contra-revenue adjustment such as Sales Returns and Allowances. So, if a customer owed £100 and a credit note of £20 is issued, their balance falls to £80, and the seller’s reported revenue is also lowered accordingly.

This makes sense why the statement about reducing the amount owed is correct. It doesn’t increase what the customer owes, and it does affect the books by reducing assets (receivables) and revenue, not leaving liabilities unchanged. The credit note itself isn’t the entry for cash receipts; cash would be recorded only when/if a refund is made or cash is actually received.