Issuing a cancellation invoice: Step-by-step guide for beginners

Those who issue invoices can, of course, make mistakes, but it is prohibited to correct an invoice after it has been issued. This is precisely why credit notes exist, allowing incorrect documents to be invalidated and new, correct invoices to be issued.

In such cases, a total of three invoices are generated: the incorrect invoice, its reversal, and then the corrected invoice. In this guide, we will show you step by step how to reverse an invoice in practice according to the rules for reversal invoices. We will also cover the most common errors and questions that arise when declaring VAT on reversal invoices, so that you can handle these situations with confidence.

What is a cancellation invoice and when should it be used?

Definition of a cancellation invoice

A credit note invalidates the original invoice and, in accounting terms, nullifies the incorrectly issued document. The content of the credit note is identical to the original, but the invoice amounts are shown with a minus sign. The serial number of the original invoice must be indicated on the cancellation invoice to ensure traceability.

The buyer will receive the credit note once they have entered the original invoice into their accounts. Otherwise, if the original invoice has not been sent to the partner, there is no need to send the credit note either.

Difference between a cancellation invoice and a corrective invoice

The fundamental difference between the two types of invoices lies in the extent of invalidation. In the case of a cancellation invoice, a total of three invoices are issued: the original incorrect invoice, the cancellation invoice, and the new invoice issued with the correct data. In contrast, when issuing a corrective invoice, only two documents are generated, which are valid together.

A corrective invoice is used when a business transaction has taken place but the invoice contains incorrect information. Consequently, a reversal invoice issued for the purpose of correction does not actually invalidate the original invoice, as there is no obstacle to issuing a new invoice to the recipient of the original invoice.

When is cancellation mandatory?

A credit note is issued when an economic event has been invoiced but did not actually take place or was subsequently canceled. In such cases, the credit note is not issued to correct the original invoice but to invalidate it.

Most common reasons for cancellation

In practice, there are several reasons that may justify cancellation:

• The invoiced transaction did not take place or failed

• The transaction was not carried out by the issuer of the invoice.

• The previous advance payment had to be refunded in full to the buyer.

• Incorrect invoicing for a sale that never took place

• After purchasing online, the buyer exercises their right of withdrawal and returns the product.

• Guaranteed repayment

• The invoiced item was not delivered to the recipient by the issuer.

Furthermore, the fulfillment date on the cancellation invoice must always match the fulfillment date on the canceled invoice. Cancellation is not time-bound and can be done weeks or months later.

Cancellation policy and preparations

The rules to be followed when reversing an invoice begin in the preparatory phase. Before I start the actual reversal, I need to pay attention to four basic areas that determine the correct issuance of the reversal invoice in accordance with the rules.

Agreeing on a completion date

I must include the same fulfillment date on the credit note as on the original invoice. This rule applies in all cases, regardless of when I issue the credit note. Even if I issue the credit note weeks or months after the original invoice was issued, the fulfillment date must still match the fulfillment date on the credit note.

Verification of partner data

If the original invoice has been sent to the partner, the credit note must also be sent to them. It is still worth sending the documents to the partner even if the original invoice has not been sent, as these invoices are already included in the NAV system and the partner can view them. The partner will be notified of the error via the NAV online system.

When setting the payment deadline, I must take into account whether the original invoice has been paid. If so, the credit note entails a financial payment obligation, so it is advisable to set the payment deadline in accordance with normal business practice. Otherwise, if the original invoice has not been paid, the payment deadline on the credit memo is irrelevant.

Recording the original invoice number

The original invoice number must be indicated on the credit note. This ensures traceability and a clear link between the two documents.

Formulating the reason for cancellation

When canceling an invoice, it may be useful to record the reason for issuing the cancellation invoice, although this is not mandatory. When canceling, there is a separate field where I can enter the reason. The reason will appear in the comments section of the cancellation invoice.

Canceling an invoice - Step-by-step guide

In the billing program, cancellations can be made with just a few clicks, regardless of which billing software I use.

Step 1: Find the original invoice

First, I need to find the document I want to cancel among the issued invoices. I can find the invoices in the invoices menu, where they can be filtered by invoice block and status. It is important to note that I can only cancel one invoice at a time.

Step 2: Start the cancellation function

Clicking on the three dots at the end of the invoice line or on the operations button will bring up a menu. From this menu, I need to select the reverse invoice option[154]. In some systems, I first need to select the type of invoice to be reversed and the name of the partner in the invoice header window, then click on the modify button to bring up the reversal option.

Step 3: Fill in and check your details

After that, a data summary screen will appear for the reversal invoice. The system automatically multiplies the items on the invoice by -1. By default, the program inherits the fulfillment date according to the settings, which I can modify or disable. I must always change the date of the reversal invoice to the date on which the reversal invoice was issued. If I fail to do so, the system will display an error message.

Step 4: Issue a cancellation invoice

The details of the reversal invoice cannot be modified; they correspond to the details on the original invoice. After checking the details, click OK or Immediately and the program will generate the reversal invoice.

Step 5: Print and forward the cancellation invoice

The cancellation invoice can be sent to the customer or printed in the same way as a normal invoice. The system indicates that the original invoice has been invalidated with a red X in the status field.

Common errors and solutions when canceling

Numerous errors can occur during cancellation, which can have serious consequences in terms of VAT returns and accounting. Problems typically arise in four key areas, which I will examine in detail.

Handling incorrect delivery dates

If I have correctly indicated the date of performance on the original invoice, then the date of performance on the amended invoice must match the date of performance indicated on the original invoice. This also applies in cases where I issue a credit note because the buyer returns a previously purchased product. It is not correct to indicate the date of the credit note as the date of performance, even though the date of performance indicated on the original invoice has not actually changed.

If the original invoice contains an incorrect delivery date, I must issue a document similar to a numerical correction. Incorrect delivery dates on multiple invoices cannot be corrected on a single document; each invoice must be corrected separately.

Correcting an accidentally canceled invoice

Cancellations cannot be reversed. If I accidentally cancel an invoice, a new separate invoice will need to be issued to restore it. The invoice data must be exactly the same as the original, canceled invoice. By dates, I mean the fulfillment date and the payment deadline. If, when issuing the cancellation invoice, I entered a delivery date that differs from that of the original invoice, the new replacement invoice should show the delivery date of the cancellation invoice. It is advisable to add a reference to the original and incorrect cancellation invoice to the comments on the new invoice.

Questions regarding VAT returns for cancellation invoices

The display of the credit note in the VAT return depends on the date of performance and the date of transfer. According to the law on general sales tax, if the tax payable decreases, I am entitled to take the difference into account at the earliest in the tax assessment period in which the credit note invalidating the original invoice is available to the entitled person. Provided that the date of performance of the original invoice is October, its place is in the October return, but the negative payable effect may appear at the earliest in the month of delivery of the credit note.

Canceling a settled invoice

If I need to make a credit note for a transaction that has already been completed and paid for, I must reverse the original invoice. If the original invoice has a credit note, the credit note data can be downloaded in a CSV file during the reversal process.

Summary

All in all, I now have all the knowledge I need to issue credit notes correctly. Agreeing on the fulfillment date, indicating the serial number of the original invoice, and recording the data accurately are particularly important for error-free credit notes.

Invoicing programs simplify this process, allowing us to invalidate incorrect receipts with just a few clicks. If I consistently follow these rules, the reversal invoice will not cause any problems during VAT returns. With practice, reversals will become a routine task in my business.