Free credit note generator

How to issue a credit note

1. Find the original invoice. Have the original invoice number and date ready. Every credit note should name it.
2. Number the credit note. Give it its own sequence, such as CN-0001. Do not reuse the invoice number.
3. Add parties and the reason. Enter your details and the customer’s, then choose why you are crediting: returned goods, pricing error, service not delivered, agreed discount or duplicate invoice.
4. List what is credited. Add a line for each item or amount being credited, with quantity and price. Use the same tax rates as on the original invoice.
5. Check the totals. The credit total is shown as a credit and tax is reduced by the same proportion. Apply it to the customer’s balance or refund it.
6. Export and send. Download the PDF, send it to the customer, and keep a copy with the original invoice in your records.

What is a credit note?

A credit note, also called a credit memo or credit memorandum, is a document that reduces the amount a customer owes. It is issued by the seller after an invoice has been sent, and it refers to that invoice. It is the clean way to fix a mistake or record a return or a discount without deleting or editing an invoice that has already been issued and recorded.

The credit can be used in three ways: the customer deducts it from the original invoice and pays only the difference, you apply it to a future invoice, or you refund the money. A credit note does not itself move money; it records the adjustment.

Because invoices are part of your accounting and tax records, it is usually inappropriate to alter one after it has been sent. A credit note, followed by a corrected invoice if needed, leaves a visible trail.

When you should issue a credit note

• Returned goods. The customer sends items back and you accept the return.
• Pricing or quantity error. You overcharged, or billed for 10 units when 8 were delivered.
• Service not delivered or partly delivered. You credit the part that was not provided.
• Discount or rebate agreed after invoicing. A goodwill reduction, volume rebate or settlement discount.
• Duplicate invoice. The same sale billed twice.
• Cancelled order. You cancel an invoice in full. Credit the full amount rather than deleting it.

If the invoice was wrong in several ways, many sellers credit it in full and issue a new, correct invoice. That is easier to read than a series of small adjustments.

What a credit note should include

• The words “Credit note”, and a unique credit note number.
• The date of issue.
• Your name, address and tax number if registered; the customer’s name and address.
• The number and date of the original invoice, so it can be matched specifically and unambiguously.
• The reason for the credit.
• The items or amounts credited, with quantities, prices and tax rates as on the original.
• The tax credited, shown separately, and the total credit.
• How the credit will be applied: deducted from the invoice, carried forward or refunded.

Rules vary by country, and the terms differ as well: Australia uses the term “adjustment note” for GST. See the next section.

Tax: VAT, GST and sales tax on credit notes

If you charged tax on the original invoice, a credit note normally reverses the tax in proportion. The customer, if registered, reduces the tax they claimed, and you reduce the tax you owe. The detail depends on the country:

• European Union. The VAT Directive treats a document that amends an invoice and refers to it specifically and unambiguously as an invoice for these purposes. Member states set the exact content and timing; check your own tax authority.
• United Kingdom. HMRC expects a VAT credit note to show the details needed to identify the original invoice, and the VAT credited. Check HMRC’s guidance for what you must keep and when you adjust your return.
• Australia. The ATO calls them adjustment notes. If a sale is later cancelled or the price changes, an adjustment note is the document that supports the GST adjustment.
• Canada and New Zealand. Credit notes support adjustments to GST/HST and GST respectively; see the CRA and Inland Revenue guidance.
• United States. There is no federal VAT, so a credit memo is mostly a bookkeeping document. Sales tax on returns follows state rules; check the relevant state revenue department.

Whatever the country, the safest approach is to keep the original rate, reference the original invoice, and leave a copy of both in the same file.

Worked example: credit for returned goods

A supplier invoiced a shop for 10 chairs at €85 each, plus 21% VAT. The shop returns 2 damaged chairs.

The shop pays €822.80 rather than €1,028.50. The supplier’s VAT return reflects the lower sale. Both sides can trace the change to CN-0007 and INV-0120.

Common mistakes

• Deleting or overwriting the invoice. Keep the original and issue a credit note.
• Forgetting the original invoice number. Without it, the credit cannot be matched to the original.
• Using different tax rates. Credit at the rate that applied to the original sale.
• Issuing a refund with no credit note. Refunds still need a paper trail.
• Not telling the customer. Send the credit note promptly so they can adjust their records.
• Mixing up the sequence. Credit notes should have their own continuous numbering.

Glossary

Credit note / credit memo

A document that reduces the amount owed on an earlier invoice.

Adjustment note

The Australian term for a document that supports a GST adjustment.

Debit note

A document that increases the amount owed.

Refund

Actual payment of money back to a customer.

Settlement discount

A reduction for paying early, sometimes recorded with a credit note.

Audit trail

The chain of documents that shows how a figure came about.

Related topics

• credit note generator
• credit memo
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• adjustment note
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• free credit note