Credit Notes & Proration

Credit Notes Overview

A credit note is like a reverse invoice. It details the items, discounts, and taxes you are crediting back to your subscribers. Your revenue is essentially your invoices deducted by credit notes.

What Generates Credit Notes?

  1. Plan change prorations (i.e. migrations) where the subscriber receives credit for the unused portion of the plan period for which they’ve already paid.
  2. Prorated component allocation changes where the price is reduced and the subscriber receives credit for the price reduction
  3. Partial voids on invoices
  4. Refunds for invoices where you no longer expect payment
  5. General service credits (i.e. credit or service you owe the customer) are converted to a credit note when the service credit account is consumed

See “Credit Note Generation Cases”, below, for more.

Origin Invoices

Most credit notes reference one or more origin invoices that are being credited.

An invoice that serves as an origin invoice for a credit note usually has its line items referenced on the credit note. Any line item being credited will also appear on the credit note. If you use the API to pull details of the origin invoice and the credit note, you will see that the same numeric identifier is used on the origin invoice line item and the credit note line item, although with different prefixes. For example, the uid for an origin invoice line item might be li_12345, while its counterpart on the credit note would be cnli_12345.

Credit notes’ origin invoices are available in the API under the origin_invoices key.

Single Origin Invoice Case

Credit notes often reference a single origin invoice. For example, imagine a subscriber is invoiced (via Invoice #1) for the Basic Plan on Jan 1st and they pay in full. Then, on Jan 15th, the customer upgrades to the Pro Plan. First, the subscriber is given a credit for the unused portion of the Basic Plan. This credit is represented on Credit Note #21 whose origin invoice is recorded as Invoice #1. Next, the subscriber is invoiced for the partial period of Pro Plan from Jan 15th to Feb 1st on Invoice #3. Finally, the credit note is applied to Invoice #3 (since Invoice #1 is already paid), thereby reducing the amount due on Invoice #3 by the amount of the credit note. See “Credit Note Applications”, below.

Multiple Origin Invoice Case

Credit notes can sometimes reference more than one origin invoice. This indicates that line items from multiple invoices are the origin for the credit being issued.

This can happen if there is a mid-period prorated allocation change on a proratable component. For example, say there are 10 units of a $1/unit/mo component allocated at the beginning of the subscription period. The customer would be charged $10 for these units. Then, midway through the period, the customer increases to 20 units, and the merchant captures a prorated charge for a percentage of the cost difference between 10 units and 20 units. Later, the customer upgrades to a new plan that includes 100 units, so needs to be given a credit for the unused portion of the units they have already paid. In this case, the customer will receive a credit for both the original 10 unit charge and the prorated charge that took them from 10 to 20 units. The credit note would reference both line items and, hence, both invoices.

Discounts and Taxes

Credit notes capture the return of discounts and taxes as well. For example, given an original line item subtotal is $100, with a 10% discount (-$1.00) and a 10% tax ($0.99), a credit of that line item would include references to the same discount and same tax as the original line.

Credit Note Applications

Credit notes can be applied to invoices, reducing their amount due. Often, a credit note’s origin invoice is different from the invoice to which it is applied. Consider an invoice that has already been paid that is then credited. Once the credit note is created, there is a choice: either that credit may be returned to the customer as a refunded, or the credit note can be applied to the next invoice to reduce the amount owed by the customer. Since Chargify is a recurring billing system, the default behavior is the latter.

Credit notes’ applications are available in the API under the applications key. Conversely, invoices indicate the credit notes applied to them under the credits key.

Credit Note Generation Cases

The following are some examples of what might cause the creation of a credit note. It is important to note that when considering an origin invoice, we do not differentiate between open and paid invoices. An open invoice at the time of a product migration is still expected to be paid in the future so we generate a credit note for eligible open amounts the same as we would for a paid amount.

If the open invoice is not expected to be collected on, it should be voided before the credit note generation occurs. Or, in the case of a component allocation downgrade, the downgrade scheme should be explicitly set to “Do Not Credit.” (Proration Schemes).

1. Upgrade/Downgrade Migration

The pro-ratable line items on the previous invoice are credited.

Origin Invoice: Previous recurring invoice Application Invoice: Next recurring invoice

2. Mid-period/Prorated Component Allocation Downgrades

The credit amount is determined by calculating the cost difference, optionally with proration, from the currently allocated quantity to the new quantity.

Origin Invoice: N/A Application Invoice: Next recurring invoice

3. Partial Invoice Voids

The remainder (unpaid portion) of every line item on the invoice is credited.

Origin Invoice: Invoice being voided Application Invoice: Invoice being voided (same as origin)

4. Invoice Refunds

The amount being refunded of every line item on the invoice is credited.

Origin Invoice: Invoice being refunded Application Invoice: Invoice being refunded (same as origin)

5. General Service Credit

When a service credit is given, the amount of the credit sits in a “credit account”, waiting to be converted to a credit note at the time of application.

Origin Invoice: The invoice receiving the service credit Application Invoice: The invoice receiving the service credit (same as origin)

  1. Regarding invoice and credit note numbering: Numbering is sequential across both invoices and credit notes combined.