If you are using a FIFO stock system and/or cost accounting (maintaining stock values in the Nominal Ledger), two complications can arise from the issuing of a Credit Note:

some Credit Notes will involve the return of goods to stock, whereas others may not; and
FIFO becomes impossible to calculate, as it is difficult to establish the actual cost of the goods being returned. For example, if you buy three Items costing 10.00, 11.00 and 12.00, and sell two of them, their FIFO costs will be 10.00 and 11.00 respectively. If one is returned, without intervention the system has no way of knowing whether it is the 10.00 Item or the 11.00 Item.

For these reasons, it is recommended that you follow these steps when issuing Credit Notes:

In a case where the Item being returned was originally issued on a Delivery raised from a Sales Order, return to the Sales Order and enter a record to the Returned Goods register using the 'Returned Goods' function on the Operations menu. Once this has been done, you can either issue a replacement with another Delivery or, if no replacement is required, raise a new Invoice for a negative quantity (effectively a Credit Note) using the 'Invoice' function, again on the Operations menu of the Order. Stock levels are updated by the Returned Goods record, as are stock valuations in the Nominal Ledger if you are using cost accounting (set using the Sub Systems setting in the Nominal Ledger).
In a case where there is no Sales Order, the Item being returned would originally have been issued using an Invoice. This Invoice should first be credited, using the process described here. When the Payment Terms field is changed to "CN", the Update Stock check box on the 'Delivery' card is switched off. This should not be switched on again as doing so will mean that the Nominal Ledger stock valuation will become inaccurate: the wrong FIFO value (that of the next stock item, 12.00 in the example above) will be used. Instead, approve the Credit Note (to update the Sales Ledger and the Debtor, VAT and Sales Accounts in the Nominal Ledger). Then, receive the Item back into stock using the Goods Receipt register in the Stock module. This will correctly update stock levels and, if you have so determined in the Sub Systems setting, the Nominal Ledger stock valuation.

In both cases, because the system cannot obtain a FIFO valuation, it is recommended that you set the cost prices manually (in the Goods Receipt or the Returned Goods record): you may first need to find out the true value of the returned goods from flip C of the original Invoice (in the case where there is no related Sales Order) or from the flip C of the original Delivery record.

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