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2-Way Matching is an accounts payable control process that compares two key documents — a purchase order and a supplier invoice — to ensure they match before payment is approved. Its purpose is to confirm that what was invoiced aligns with what was ordered, helping organisations prevent errors, overbilling, and unauthorised spend.

2-Way Matching is commonly used in procurement and accounts payable workflows, particularly where goods receipts are not required or where services are billed rather than physically delivered.

2-Way Matching is the process of verifying that the details on a supplier invoice match the details on the corresponding purchase order. This typically includes checking quantities, prices, and line-item descriptions.

If the invoice matches the purchase order within predefined tolerances, it can be approved for payment. If discrepancies are found, the invoice is flagged for review before any funds are released.

Unlike more complex matching methods, 2-Way Matching focuses only on the agreement between buyer and supplier, without confirming physical receipt of goods.

The 2-Way Matching process begins once a supplier submits an invoice. The accounts payable team or automated system retrieves the relevant purchase order and compares it against the invoice.

Key fields such as unit price, total amount, and item descriptions are checked for consistency. If the invoice aligns with the purchase order, it proceeds through approval and payment. If not, the invoice is routed for investigation or correction.

Many finance teams use automated AP software to perform 2-Way Matching at scale, reducing manual review and speeding up invoice processing.

Companies typically use 2-Way Matching when the delivery of goods or services does not require formal confirmation or when tracking physical receipt is impractical.

Common scenarios include service-based purchases, subscriptions, software licences, consulting fees, and other non-inventory expenses. In these cases, verifying the invoice against the purchase order is often sufficient to ensure accuracy and control.

2-Way Matching is also used in lower-risk purchasing environments where speed and efficiency are prioritised over additional verification steps.

2-Way Matching is important because it provides a balance between financial/spend control and operational efficiency. By validating invoices against purchase orders, companies can reduce the risk of paying incorrect or unauthorised charges without introducing unnecessary complexity.

This process helps finance teams catch pricing errors, duplicate invoices, and billing inconsistencies early. It also supports stronger compliance and audit readiness by ensuring payments are backed by approved purchasing documentation.

For organisations handling high invoice volumes, 2-Way Matching plays a key role in maintaining scalable and reliable accounts payable operations.

2-Way Matching is often compared with 3-Way Matching, another common AP control method.

While 2-Way Matching compares the purchase order and invoice, 3-Way Matching adds a third document, typically a goods receipt or service confirmation, to verify that the order was actually fulfilled.

2-Way Matching is generally faster and simpler, while 3-Way Matching provides stronger control for physical goods, inventory, or high-value purchases. Many organisations use both methods depending on the type of spend and risk profile.

Benefits and limitations of 2-Way Matching

2-Way Matching offers clear benefits, including faster invoice processing, reduced administrative effort, and improved spend visibility. It is particularly effective for recurring or service-based expenses.

However, because it does not confirm receipt, it may not be suitable for all purchasing scenarios. For goods-based procurement or high-risk spend, additional verification steps may be required to ensure accuracy and accountability.

Modern accounting and spend management platforms often automate 2-Way Matching by integrating purchase orders, invoices, and approval workflows in a single system. Automation reduces manual effort, improves accuracy, and enables finance teams to process invoices more efficiently.

By embedding 2-Way Matching into accounts payable workflows, companies can maintain control while supporting faster close cycles and better cash flow management.

2-Way Matching is an accounts payable process that compares purchase orders and invoices to verify accuracy before payment. It provides an efficient control mechanism for many types of business spend, particularly services and subscriptions, helping organisations reduce errors, maintain compliance, and streamline invoice processing.

2-Way Matching compares a purchase order (PO) to a supplier invoice before approving payment.

It helps catch pricing/quantity mismatches, duplicate invoices, and unauthorised charges early.

It is commonly used for subscriptions, software licences, consulting, and other purchases where goods receipts aren’t required.

It’s quicker and less complex than 3-Way Matching, but offers less assurance because it doesn’t confirm receipt or delivery.

Key takeaways

Learn what 2-way matching is, how it works, when it’s used, and why it matters for accurate invoice processing and AP control.

2-Way Matching: Definition, How It Works, and Importance for Finance

3-Way Matching is an accounts payable verification process used to confirm that a payment request is valid before money leaves the business. It does this by cross-checking three documents: the purchase order, the supplier invoice, and a goods receipt or service confirmation.

By validating not only what was ordered and billed, but also what was actually received, 3-Way Matching introduces a higher level of financial control into procurement and invoice processing workflows.

At its core, 3-Way Matching ensures alignment between authorisation, delivery, and billing. An invoice is only approved once it matches both the original purchase order and confirmation that the goods or services were received as expected.

This additional verification step makes 3-Way Matching particularly effective for purchases where quantity, delivery, or fulfilment risk is higher. It helps organisations avoid paying for items that were never delivered, partially delivered, or incorrectly billed.

The process begins when an invoice is received from a supplier. Instead of reviewing the invoice in isolation, the accounts payable team (or an automated system) retrieves the associated purchase order and the relevant receipt documentation.

Details such as quantities, unit prices, and totals are compared across all three records. If the information aligns within defined tolerances, the invoice moves forward for approval and payment. If not, it is flagged for investigation before any funds are released.

In modern finance environments, this matching process is often automated, allowing large volumes of invoices to be validated quickly without manual intervention.

3-Way Matching is most commonly used for goods-based procurement, where confirming delivery is essential. This includes inventory purchases, equipment, raw materials, and other physical items.

It is also frequently applied to high-value or higher-risk purchases, where additional oversight is required to protect the business. In contrast, organisations may choose simpler matching methods for services or subscriptions, where receipt confirmation adds less value.

The primary value of 3-Way Matching lies in risk reduction. By requiring proof of delivery alongside billing and approval, it significantly lowers the chance of incorrect, duplicate, or fraudulent payments.

For finance teams, this process strengthens internal controls, supports compliance requirements, and provides a clear audit trail. It also increases confidence that payments accurately reflect real business activity, not just paperwork alignment.

In procurement-heavy organisations, 3-Way Matching is a key safeguard against financial leakage.

While both methods are used to validate invoices, 3-Way Matching introduces an additional layer of verification. Unlike 2-Way Matching, which compares only the purchase order and invoice, 3-Way Matching also confirms receipt.

This makes it more robust but also slightly more resource-intensive. As a result, many organisations apply 3-Way Matching selectively, depending on the nature, value, and risk profile of the purchase.

Benefits and trade-offs of 3-Way Matching

3-Way Matching offers stronger financial control and greater accuracy, particularly for physical goods and complex supply chains. It helps catch discrepancies early and prevents payments for incomplete or incorrect deliveries.

However, the process can slow invoice approvals if receipt confirmation is delayed or handled manually. Without automation, this can introduce bottlenecks in accounts payable workflows.

Modern AP and procurement systems address this trade-off by digitising receipts and automating document matching, allowing companies to maintain control without sacrificing speed.

3-Way Matching in modern finance operations

Today, 3-Way Matching is typically embedded within integrated finance platforms that connect purchasing, receiving, and accounts payable. These systems automatically link purchase orders, invoices, and receipts, applying rules and tolerances in the background.

This approach allows finance teams to scale operations, improve visibility, and maintain strong controls as transaction volumes grow.

3-Way Matching is an accounts payable process that validates invoices by comparing them against both the original purchase order and proof of receipt. By ensuring that purchases are authorised, fulfilled, and billed correctly, it helps organisations reduce risk, improve accuracy, and strengthen financial control across procurement and payment workflows.

Learn what 3-way matching is, how it works, when it’s used, and why it matters for invoice accuracy, control, and fraud prevention.

3-Way Matching: Definition, How It Works, and Why It Matters

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AI agents are autonomous or semi-autonomous systems that can perceive their environment, make decisions, and take actions to achieve specific goals. Unlike traditional software, AI agents are designed to operate dynamically — responding to inputs, adapting to changing conditions, and completing tasks with limited human intervention.

AI agents are increasingly used across software applications, enterprise systems, and digital products to automate workflows, assist users, and handle complex decision-making tasks. As artificial intelligence capabilities mature, AI agents are becoming a foundational building block for intelligent, goal-driven systems.

An AI agent is an entity that observes its environment through inputs, processes information using AI models or rules, and acts upon that environment to achieve an objective. The environment may be digital, physical, or a combination of both.

At a basic level, an AI agent follows a cycle of perception, reasoning, and action. It receives information, evaluates possible actions, and selects the option that best aligns with its goal. This ability to act independently distinguishes AI agents from static algorithms or simple automation scripts.

AI agents can be embedded in applications, operate as standalone systems, or coordinate with other agents as part of a larger system.

AI agents operate through a combination of data inputs, decision logic, and execution mechanisms. They continuously assess their environment, update their understanding, and adjust their actions accordingly.

Most AI agents rely on one or more of the following components:

Sensors or inputs to collect data from their environment

A decision-making mechanism, such as machine learning models, rules engines, or planning algorithms

Actuators or outputs that allow the agent to perform actions

For example, a software-based AI agent may monitor user behaviour, analyse context using a language model, and trigger actions such as generating responses, updating records, or initiating workflows.

More advanced agents can learn from past outcomes, improving their decisions over time through feedback loops.

AI agents can be categorised based on their complexity, autonomy, and learning capability.

Reactive agents respond directly to current inputs without maintaining internal memory. They are fast and predictable but limited in adaptability.

Deliberative agents maintain an internal model of the environment and plan actions based on goals and constraints. These agents can reason about future states before acting.

Learning agents improve their performance over time by learning from experience. They adapt their behaviour based on feedback, outcomes, or changing conditions.

Multi-agent systems consist of multiple AI agents that interact or collaborate to achieve shared or individual goals. These systems are used in simulations, optimisation problems, and complex enterprise workflows.

Traditional automation follows predefined rules and executes tasks in a fixed, predictable way. AI agents, by contrast, can adapt their behaviour based on context, uncertainty, and changing inputs.

While automation executes instructions, AI agents make decisions. This allows them to handle unstructured data, manage exceptions, and operate in environments where outcomes are not fully predictable.

In practice, many modern systems combine both approaches — using automation for routine steps and AI agents for decision-making, coordination, or exception handling.

AI agents are used across a wide range of applications, from consumer products to enterprise systems.

In digital products, AI agents power conversational assistants, recommendation systems, and personalised user experiences. In enterprise environments, they support workflow orchestration, data analysis, and operational decision-making.

AI agents are also used in areas such as customer support, software development, cybersecurity monitoring, supply chain optimisation, and financial operations. Their ability to operate continuously and respond intelligently makes them well suited to complex, high-volume tasks.

AI agents in business and finance operations

In business contexts, AI agents are increasingly applied to automate processes that require judgement rather than simple rule execution. This includes tasks such as document processing, anomaly detection, approval routing, forecasting, and compliance monitoring.

In finance operations, AI agents may assist with invoice handling, spend analysis, cash flow monitoring, or reconciliation. By acting on real-time data and predefined goals, they help teams reduce manual work while maintaining control and accuracy.

AI agents can also act as intelligent interfaces, guiding users through complex systems or surfacing insights proactively. One such example is AP automation, where AI is able to handle workflows that would otherwise be done manually with speed and accuracy.

Several characteristics define effective AI agents. Autonomy allows agents to operate without constant supervision. Reactivity enables them to respond to new information in real time. Proactivity allows them to pursue goals rather than waiting for instructions. Adaptability enables learning and improvement over time.

Not all AI agents exhibit all of these traits, but most combine them to varying degrees depending on their design and use case.

AI agents offer a number of advantages over manual processes and traditional automation. They can handle large volumes of tasks simultaneously, operate continuously, and adapt to changing conditions.

For organisations, this translates into improved efficiency, faster response times, and better use of human expertise. AI agents can take on repetitive or complex operational work, allowing teams to focus on higher-value activities.

Because agents can be designed around specific goals, they also support more consistent decision-making across processes.

Despite their potential, AI agents also present challenges. Designing reliable agents requires clear objectives, high-quality data, and well-defined boundaries for action.

Poorly designed agents may behave unpredictably, make incorrect decisions, or require extensive monitoring. There are also considerations around transparency, accountability, and security, especially when agents operate autonomously in sensitive systems.

As a result, many organisations deploy AI agents with human oversight, gradually increasing autonomy as confidence and controls improve.

Governance plays a critical role in responsible AI agent deployment. This includes defining what actions agents are allowed to take, how decisions are logged, and when human intervention is required.

Clear governance frameworks help ensure AI agents operate within ethical, legal, and organisational constraints, particularly in regulated environments.

AI agents are expected to play an increasingly central role in software and business systems. As models become more capable and integration improves, agents will handle more complex tasks, collaborate with other agents, and operate across multiple systems.

Rather than replacing human decision-making, AI agents are likely to act as intelligent partners — augmenting human work with speed, scale, and analytical capability.

AI agents are autonomous or semi-autonomous systems that perceive their environment, make decisions, and act to achieve specific goals. By combining adaptability, decision-making, and execution, AI agents go beyond traditional automation and enable more intelligent, responsive systems. As organisations adopt AI-driven workflows, AI agents are becoming a foundational component of modern digital and operational infrastructure.

AI agents are systems that perceive, decide, and act to achieve goals

They operate autonomously or semi-autonomously with limited human input

AI agents go beyond automation by adapting to context and uncertainty

They are increasingly used in enterprise and operational workflows

Learn what AI agents are, how they work, key use cases, and why they matter for automation, decision-making, and modern software.

AI Agents: Definition, How They Work, and Use Cases

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Accruals are accounting adjustments used to recognise revenues and expenses in the period in which they are earned or incurred, rather than when cash is received or paid. They are a core element of accrual accounting and ensure that financial statements reflect the true economic activity of a business.

By recording income and costs when they arise, accruals improve the accuracy, consistency, and usefulness of financial reporting. Most businesses use accrual accounting because it provides a clearer picture of performance than cash-based accounting, especially when transactions span multiple accounting periods.

Accruals are entries made at the end of an accounting period to account for transactions that have occurred but have not yet been settled in cash. They exist because business activity does not always align neatly with payment timing.

For example, a company may receive services in one month but pay for them in the next. Without accruals, expenses and revenues would appear in different periods, distorting financial results. Accruals correct this by ensuring that financial statements reflect what actually happened during the reporting period.

Accruals generally fall into two categories: accrued expenses and accrued revenues.

Accrued expenses represent costs that a business has already incurred but has not yet paid. Common examples include wages earned by employees but paid in the next payroll cycle, utilities consumed but not yet invoiced, or interest that has accumulated on a loan. These expenses are recognised in the income statement, with a corresponding liability recorded on the balance sheet until payment is made.

Accrued revenues, on the other hand, represent income that has been earned but not yet billed or received. This might occur when services are delivered near the end of a period but invoicing happens later. In these cases, revenue is recognised along with a corresponding asset, typically recorded as accounts receivable.

When cash is eventually paid or received, the accrued balance is cleared so the transaction is not recorded twice.

Accruals are essential because they ensure that financial statements accurately reflect business performance. By aligning revenues and expenses with the periods in which they occur, accruals support the matching principle and provide a more realistic view of profitability.

They also make financial results more comparable across periods. Without accruals, fluctuations in payment timing could create misleading spikes or dips in reported income and expenses. Accruals smooth these effects by focusing on economic activity rather than cash flow alone.

From a governance and compliance perspective, accruals help ensure that financial reporting meets accounting standards and provides stakeholders with reliable information.

Accruals are typically recorded during the period-end close process, whether on a monthly, quarterly, or annual basis. Finance teams review transactions and identify expenses and revenues that relate to the reporting period but have not yet been processed through cash payments or invoices.

This often includes recording employee wages earned through the end of the period, estimating utility costs before bills arrive, or recognising revenue from partially completed contracts. Once the period closes, these accruals ensure the financial statements are complete.

In the following period, accrual entries are reversed or settled when the actual cash transaction occurs.

Accrual accounting differs significantly from cash accounting. Under cash accounting, revenues and expenses are recognised only when money changes hands. While simpler, this approach can give a distorted view of performance when payments are delayed or received in advance.

Accrual accounting, supported by accrual entries, overcomes this limitation by recognising transactions based on economic activity rather than payment timing. This makes it the preferred method for most businesses and a requirement under many accounting standards.

Accruals influence both the income statement and the balance sheet. On the income statement, they ensure that revenues and expenses appear in the correct period. On the balance sheet, they create assets or liabilities that represent amounts owed to or by the business at the reporting date.

Together, these effects ensure that financial statements present a complete and balanced picture of a company’s financial position and operating results.

When transactions involve multiple currencies, accruals are typically recorded in the company’s reporting currency using an appropriate exchange rate at period end. This ensures costs and revenues are recognised in the correct reporting period, even if settlement occurs later.

In some cases, accruals may also need to include foreign transaction fees charged by banks or payment providers. When the invoice is received or payment is made, any differences between the accrued amount and the final settled amount, including exchange movements or transaction fees, are recorded as foreign exchange gains or losses. Consistent exchange rate and fee treatment helps keep accruals accurate and comparable across reporting periods.

Managing accruals well requires consistency and judgement. Finance teams must regularly review outstanding obligations and earned but unbilled revenue, apply reasonable estimates, and adjust accruals when actual amounts become known.

Clear documentation and regular reconciliation help ensure accruals remain accurate over time. Many organisations also rely on accounting software to automate recurring accruals and reduce manual effort, especially as transaction volumes grow.

Accruals are accounting adjustments that recognise revenues and expenses when they are earned or incurred, not when cash is exchanged. They are fundamental to accrual accounting and play a key role in producing accurate, comparable financial statements. By capturing economic activity in the correct reporting period, accruals help businesses maintain reliable records and make better-informed financial decisions.

Learn what accruals are, how accrual accounting works, and why accruals are essential for accurate financial reporting.

Accruals: Definition, How They Work, and Why They Matter

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A Chart of Accounts (COA) is a structured list of all the financial accounts a business uses to record, categorise, and organise its financial transactions. It forms the foundation of a company’s accounting system and underpins how financial data is recorded in the general ledger and reported in financial statements.

In practice, the chart of accounts acts as a financial map. It ensures that every transaction — from revenue and expenses to assets and liabilities — is recorded consistently and in the correct place, enabling accurate reporting, analysis, and compliance.

A chart of accounts is a complete index of all the accounts used in a company’s bookkeeping and accounting processes. Each account represents a specific type of financial activity and is assigned a unique name and, in most cases, an account number.

The COA itself is not a financial report. Instead, it is a reference structure that supports the creation of financial statements such as the balance sheet, income statement, and cash flow statement. When transactions are recorded, they are posted to the appropriate account in the chart of accounts, ensuring consistency across the organisation’s financial records.

Because of this, the design of a chart of accounts directly influences how easily financial data can be understood and analysed.

A chart of accounts is typically organised into high-level categories that mirror the structure of a company’s financial statements. While the exact format can vary, most COAs include the following core groups.

Assets represent what the business owns or controls, such as cash, accounts receivable, inventory, and fixed assets like equipment or property.

Liabilities capture what the business owes to others, including accounts payable, loans, accrued expenses, and taxes payable.

Equity reflects the owners’ interest in the business after liabilities are deducted from assets. This includes share capital, retained earnings, and reserves.

Revenue accounts track income generated from a company’s primary business activities, such as product sales or service fees.

Expenses record the costs incurred to operate the business, including payroll, rent, marketing, software, and utilities.

Within each category, accounts can be further broken down to reflect departments, cost centres, or specific types of activity. This level of detail allows companies to analyse financial performance more precisely.

Most charts of accounts use a numbering system to organise accounts logically and make them easier to manage. For example, asset accounts may start with one range of numbers, liabilities with another, and expenses with a different range.

While numbering conventions differ between organisations, the goal is consistency and scalability. A well-designed numbering system allows new accounts to be added as the business grows without disrupting existing reporting structures.

The chart of accounts is important because it provides structure and clarity to financial data. Without a clearly defined COA, transactions may be recorded inconsistently, leading to unreliable reports and poor decision-making.

A well-designed chart of accounts helps ensure that:

Financial transactions are recorded accurately and consistently

Financial statements reflect the true position and performance of the business

Budgets and forecasts can be compared meaningfully against actual results

Audits and compliance checks are easier to perform

For finance teams, the COA is a critical tool for maintaining control and visibility across all areas of the business.

Companies use the chart of accounts every time a financial transaction is recorded. When an invoice is issued, a bill is paid, payroll is processed, or an asset is purchased, the transaction is posted to one or more accounts in the COA via the general ledger.

Because accounting software relies on the chart of accounts to classify transactions, the COA enables automated financial reporting. Profit and loss statements, balance sheets, and management reports can all be generated directly from the underlying account structure without manual reclassification.

The level of detail in a COA often reflects a company’s size and complexity. Smaller businesses may use a relatively simple chart of accounts, while larger organisations may require hundreds of accounts to capture activity across multiple entities, locations, or departments.

There is no single universal chart of accounts that fits every business. Companies typically customise their COA based on industry requirements, reporting needs, and internal management preferences.

For example, a software company may include detailed revenue and subscription accounts, while a manufacturing business may require more granular inventory and cost-of-goods-sold accounts. The key is balancing detail with usability — too few accounts can limit insight, while too many can make reporting difficult to manage.

Common challenges with a Chart of Accounts

Over time, charts of accounts can become overly complex or outdated. Common challenges include duplicated accounts, unclear naming conventions, and inconsistent use across teams.

If not reviewed regularly, a COA can make financial reporting harder rather than easier. This is why many finance teams periodically restructure or simplify their chart of accounts to better reflect how the business operates.

Modern accounting and finance platforms help address these challenges by enforcing standardisation and making it easier to maintain a clean, well-organised COA.

Chart of Accounts and financial reporting

The chart of accounts plays a central role in financial reporting because it determines how transactions flow into reports. Each line item in the income statement or balance sheet is typically derived from one or more accounts in the COA.

As a result, the quality of financial reporting depends heavily on the quality of the chart of accounts. A clear, logical COA leads to more accurate reporting, better insights, and stronger financial decision-making.

A Chart of Accounts (COA) is the backbone of a company’s accounting system. By providing a structured list of all financial accounts, it ensures that transactions are recorded consistently and reported accurately. A well-designed chart of accounts improves financial and spend visibility, supports compliance, and enables meaningful financial analysis as a business grows.

Learn what a chart of accounts (COA) is, how it’s structured, and why it matters for accurate accounting, reporting, and financial control.

Chart of Accounts (COA): Definition, Structure, and Importance

A credit note (also called a credit memo) is a document issued by a seller to reduce the amount a customer owes on a previously issued invoice. It serves as an official adjustment to correct an invoice after it has been created, while keeping a clear audit trail of what changed and why.

Credit notes are commonly used when goods are returned, services are cancelled, the wrong price was charged, or an invoice contains an error. In accounting, they ensure customer balances, revenue figures, cash flow reporting, and tax reporting reflect the corrected transaction rather than the original, incorrect amount.

A credit note is essentially the opposite of an invoice: instead of requesting payment, it confirms that the customer’s account has been credited for a specified amount. It may reduce an outstanding invoice balance or create a credit balance that can be refunded or applied to future invoices.

Importantly, a credit note does not usually replace or delete the original invoice. Instead, it links back to it and records the adjustment formally—this is key for accounting accuracy and traceability.

Credit notes are issued when the original invoice needs to be reduced after the fact. Common scenarios include returns, cancellations, or billing mistakes that are discovered after the invoice has been sent.

For example, a credit note may be required when a customer returns part of an order, when an item is damaged and a partial discount is agreed, or when an invoice was issued with the wrong quantity, unit price, tax rate, or discount. Credit notes are also used when a duplicate invoice was issued or when a service is not delivered as agreed. Being able to issue credit notes is an important part of effective invoice management.

A credit note is typically created with a reference to the original invoice and the amount being credited. What happens next depends on whether the invoice is still unpaid or has already been paid.

If the invoice is unpaid, the credit note reduces the amount due and the customer pays the corrected balance. If the invoice has already been paid, the credit note records that the customer is owed value back. Businesses usually handle this either by issuing a refund or by applying the credit to a future invoice.

Either way, the credit note creates a clear accounting record that ties the correction to the original transaction.

A credit note and a refund are related but not the same thing. A credit note is the accounting document that reduces what the customer owes (or creates a customer credit balance). A refund is the action of returning money to the customer.

In many workflows, a credit note comes first to document the adjustment, and the business then decides whether to refund cash or apply the amount as credit toward a future purchase.

A credit note reduces the invoiced amount. A debit note is generally used in situations where the amount should be increased, such as when the customer was undercharged or additional goods/services were provided after the original invoice.

In simple terms: credit notes decrease balances, while debit notes increase them.

What information should a credit note include?

To be useful operationally and in accounting, a credit note should clearly identify the transaction it relates to and the nature of the adjustment. Most credit notes include a unique reference number and date, supplier and customer details, the original invoice number, a description of what is being credited, and the credited amount (often including tax treatment where relevant).

Clear references and consistent formatting reduce disputes and make invoice reconciliation significantly easier.

How are credit notes recorded in accounting?

Credit notes affect both customer balances and financial reporting. They typically reduce accounts receivable and reduce revenue (or are recorded against returns/allowances, depending on the accounting setup). If the credit relates to returned goods, there may also be inventory and cost-of-goods adjustments.

The main purpose is consistency: credit notes ensure the accounting records reflect the corrected reality of the transaction, rather than leaving the original invoice unadjusted.

Why credit notes matter for tax and compliance

Credit notes play an important role in keeping tax reporting accurate, because they change the taxable amount of a sale. When an invoiced amount is reduced, businesses may need to reflect that reduction in VAT or sales tax reporting, depending on local rules.

They also support audit trails by showing exactly what changed after invoicing and maintaining a consistent link between the original invoice and the correction.

Credit notes are easiest to manage when they are created consistently and linked directly to the original invoice. It’s also helpful to standardise common credit note reasons (such as returns, pricing errors, cancellations) so reporting remains clean and disputes are easier to resolve.

Finally, finance teams typically separate the ‘credit note issued’ step from the ‘refund processed’ step to avoid over-crediting a customer or duplicating adjustments.

A credit note is a formal document that reduces or corrects a previously issued invoice. It is used for returns, cancellations, discounts, and invoice errors, helping businesses keep customer balances, accounting records, and tax reporting accurate while maintaining a clear audit trail.

Learn what a credit note is, when to issue one, how it works, and why it matters for invoicing, accounting, and tax accuracy.

Credit Note: Definition, When to Use It, and How It Works

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The Faster Payment System (FPS) is a real-time bank transfer network that allows money to be sent and received almost instantly between participating bank accounts. Originating in the United Kingdom, FPS is designed to make electronic payments faster, more convenient, and available 24/7, including weekends and holidays.

Unlike traditional bank transfers, which can take one or more business days to complete, Faster Payments typically settle within seconds. This real-time settlement improves cash flow/spend visibility, supports timely financial operations, and enables modern digital payment experiences across consumer and business use cases.

The Faster Payment System is a payments infrastructure used by banks and payment providers to process electronic transfers instantly. It eliminates the delays associated with legacy settlement cycles, allowing funds to be credited to the recipient’s account within moments of initiation.

Faster Payments covers a wide range of transactions, including person-to-person transfers, bill payments, merchant collections, salary disbursements, and business-to-business transfers, all without the multi-day lag typical of older bank transfer mechanisms.

While FPS originated in the UK and is most commonly referenced in that context, many other countries now operate similar real-time or near-real-time payment networks under different names.

When a user initiates a Faster Payment, the payer’s bank sends a payment instruction through the FPS network to the recipient’s bank. The network verifies the request and routes the funds in real time. Once authorised, the receiving bank credits the beneficiary’s account almost immediately.

Learn what the Faster Payment System is, how it works, and why real-time bank transfers matter for modern payments and cash flow.

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