A credit note is the formal way to reduce or cancel an amount you previously invoiced — for returned goods, an overcharge, a post-invoice discount, or a cancelled order. It mirrors the original invoice with its own CN number and always references the invoice it corrects.
Never edit or delete an issued invoice to fix a mistake; the credit note exists so both sides’ books show what happened. Enter the credited amounts as positive lines here — the document’s CREDIT NOTE title tells the reader the direction of the money.
How to issue a credit note correctly
Reference the original invoice number and date on the first line and in the notes — a credit note that doesn’t say what it credits is unusable to a bookkeeper. Itemize the credit the same way the invoice itemized the charge: quantity and unit price for returns, a described lump sum for corrections.
If the original invoice charged tax, the credit note must credit the tax too — set the same rate so the tax reverses proportionally. Number credit notes in their own CN- sequence and keep them even if the customer never uses the credit.
Credit note vs refund vs discount
A credit note adjusts what is owed; money only moves if you separately refund it. If the invoice is unpaid, the customer pays the invoice total minus the credit. If it was paid, the credit sits on account for future invoices or is refunded — state which in the terms.
For a discount agreed *before* invoicing, just invoice the lower amount; credit notes are for corrections *after* an invoice exists. Using them as a pricing tool muddies your revenue records and confuses tax reporting.
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Frequently asked questions
When am I required to issue a credit note?
A credit note is commonly used when an issued invoice must be reduced because of a return, overbilling, cancellation or pricing adjustment. VAT and GST rules can prescribe specific fields, timing and reporting, so confirm the applicable authority’s process rather than simply deleting the original invoice.
Should the credit note amounts be negative?
No — enter positive amounts. The document type itself signals direction: a credit note for $150 means $150 in the customer’s favor. Accounting software applies the sign on import.
Does a credit note need to match the original invoice exactly?
It must reference it exactly (number and date) and use the same tax rate, but it can credit part of the invoice — two units of five returned, or one line of many corrected.
How long should I keep credit notes?
As long as your invoices — typically 5–7 years depending on jurisdiction. They are part of the audit trail explaining why revenue for the period differs from invoices issued.