What is a credit note?
A credit note (or credit memo) is effectively a negative [invoice](/glossary/invoice). Rather than editing or deleting an invoice that has already been issued, which is poor practice and often not allowed for tax purposes, the seller issues a credit note referencing the original invoice.
When to issue a credit note
- Goods are returned or damaged
- The customer was overcharged or billed twice
- A discount or rebate is agreed after invoicing
- An order or service is cancelled
What it should include
- Credit note number and date
- Reference to the original invoice number
- Customer and seller details
- Description of items credited, amounts and reason
- Tax amounts reversed, such as [VAT](/glossary/value-added-tax-vat) or [sales tax](/glossary/sales-tax)
Accounting entry
Debit sales returns (or revenue) and tax payable, credit [accounts receivable](/glossary/accounts-receivable). The customer can then deduct it from their next payment or receive a refund.
Example
A customer is invoiced $1,150 ($1,000 + $150 VAT) and returns goods worth $200 + $30 VAT. The seller issues a $230 credit note, reducing the balance owed to $920.
Credit note vs debit note
A debit note is usually sent by a buyer to request a credit, or by a seller to increase an amount owed. A credit note reduces what the customer owes.