What Is a Credit Note? When and How to Issue One

A credit note — also called a credit memo — is a document a seller issues to a buyer that reduces the amount the buyer owes. It's effectively a negative invoice, used to correct an overcharge, account for returned goods, or apply a discount after an invoice has already been sent.

When do you issue a credit note?

You issue a credit note whenever you need to reduce a previously invoiced amount rather than cancel it entirely. Common situations include:

• The customer returned some or all of the goods
• You overcharged on the original invoice
• Goods arrived damaged or faulty
• You agreed a discount or goodwill credit after invoicing
• There was a pricing or quantity error

Credit note vs invoice vs refund

An invoice increases what a customer owes; a credit note decreases it. A credit note isn't necessarily a cash refund — it often reduces the balance owed or is applied against a future invoice. A refund is the actual return of money. Sometimes a credit note leads to a refund; sometimes it just offsets the next bill.

What to include on a credit note

1. 1The words 'Credit Note' and a unique credit note number
2. 2The original invoice number it relates to
3. 3Your details and the customer's details
4. 4The date issued
5. 5A description of why the credit is being given
6. 6The amount being credited, with tax shown separately

Keep your credit note numbering separate from your invoice sequence, and always reference the original invoice. This keeps your accounts and tax records accurate and easy to audit.