What Is a Credit Note?

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What Is a Credit Note?

Credit notes have an important role in the invoicing process, helping you correct any mistakes while ensuring your financial records remain accurate. However, as they may not be used frequently, they can cause confusion about how and when to use them. So, what is a credit note, how do you issue one, and what information do they contain?

What is a credit note? 

A credit note is a legal document that allows you to cancel out an already issued invoice, in part or in full. Essentially, it means you can remove the invoice amount from your financial records without deleting the actual invoice (which may be unlawful in countries such as the UK and US). Issuing a credit note should keep your invoice number series intact to help you maintain clear and accurate records.

Although more rare, a credit note can also be issued before an invoice has been raised.

When to issue a credit note 

Credit notes can be used whenever a change in circumstance makes the original invoice invalid. This could include if the invoice contained a mistake, such as the wrong amount, if the goods arrived damaged, or if a customer wants to amend their order after the invoice has been issued. Credit notes are often linked to invoices, however it is possible to issue them separately to use against another invoice in the future.

When a credit note is issued, the business will file it to balance their books and send it to the customer to indicate the cancellation of the payment on the original invoice.

What to include on a credit note? 

Generally, a credit note will look quite similar to an invoice, but what to include on it is less regimented. As with invoices, however, it’s crucial to include all the information that both you and your customer need to action, record and manage the credit note. This will include:

  • The date of issue
  • Credit note number
  • Payment terms
  • Contact details
  • Reason for the credit note 

It’s also a good idea to make sure it’s obvious that this is a credit note, not an invoice, so state this clearly on the document too.

The amount indicated on the credit note can be used to offset future purchases, for example, if a new order is placed. Multiple credit notes can be issued for the same invoice. However, the total amount credited should not exceed the total gross amount of the invoice.

Credit notes vs debit notes 

Now that it’s clear the role credit notes have to play in a business, it’s important that they are distinguished from debit notes. A debit note is a document raised by a customer to request that your business returns funds already paid. It acts as a formal request from the buyer to the seller to issue a credit note.

Like credit notes, debit notes can be used in several situations, for example, if goods received are incorrect or damaged, if the seller has charged more than the agreed price, or if the cost or the description of the products involved is incorrect.

Credit notes and accounting

In traditional accounting practices, credit notes will be entered as a credit for that particular customer. In double-entry bookkeeping systems, you would record the credit note as a debit under revenue and credit under accounts receivable. Be sure to record and update every credit note in the appropriate accounts to match the balance, for example, to adjust stock if a product is returned. 

How to issue a credit note in AccountsPortal

Accounting software such as AccountsPortal makes issuing credit notes hassle-free. In AccountsPortal, it’s simply a case of navigating to the Purchases tab and clicking on Add New Credit Note. A transaction ID will automatically be generated, you’ll then need to add in the name of the supplier, date and due date. You can select how the transaction will be handled in terms of VAT from a drop-down list and add a reference number and any notes. Hit save, and you can then add in the item details – name, cost, description, quantity, unit price and total. Hit save and finish, and a PDF with all the information will be generated, ready for you to email, print or clone. If you have multiple credit notes to issue, you can save and add another.

Once a credit note has been created, you can either allocate to an invoice or process a refund to the customer. If the customer has not yet made payment on the invoice, then you can allocate a credit note to one or more invoices using a Credit Allocation Note. Alternatively, if the customer has already made payment, then you may wish to refund the customer. In addition, a single credit note be partially allocated to an invoice and partially refunded, which may be necessary in some circumstances.