A credit note is a document a seller issues to reduce or cancel the amount a customer owes on an invoice. It is used when goods come back, a price was wrong or an order is cancelled after invoicing. It refers to the original invoice and, in the books, reverses all or part of that sale. Credit notes are also called credit memos.
Why credit notes matter
A sent invoice shouldn't be edited or deleted: its number is part of your audit trail and the customer may already have recorded it. A credit note corrects it while the original stays on file.
HMRC's VAT guide (Notice 700) lists what a valid credit note must show, including the original invoice's number and date. A credit note also adjusts the VAT on that invoice.
When to issue a credit note
- Returned goods: some or all of an order comes back.
- Overcharging: the wrong price, quantity or rate.
- Discount agreed after invoicing, such as a goodwill reduction.
- Cancelled order: the invoice went out before the work was called off.
- Disputed or faulty items you agree to credit.
If the customer has already paid, they are left in credit: refund it or set it against their next invoice.
What to include on a credit note
| Field | Example |
|---|---|
| Credit note number | CN-017, its own sequence |
| Date of issue | 18 March |
| Your name, address and VAT number | As on the invoice |
| Customer name and address | As on the invoice |
| Original invoice number and date | INV-1042, 3 March |
| Description and quantity | 2 oak chairs, returned damaged |
| Amount credited, excluding VAT | £200 |
| VAT rate and amount | 20%, £40 |
| Total credited | £240 |
A credit note template is an invoice layout titled Credit note, with its own numbering and a line for the original invoice number.
Credit note journal: a worked example
A furniture maker invoices a customer on 3 March for 12 chairs at £100 each plus VAT, £1,440 in total. Two arrive damaged and are returned. On 18 March it issues a credit note for £200 plus £40 VAT.
| Date | Account | Debit | Credit |
|---|---|---|---|
| 3 Mar | Trade debtors (asset) | £1,440 | |
| 3 Mar | Sales (income) | £1,200 | |
| 3 Mar | VAT (liability) | £240 | |
| 18 Mar | Sales (income) | £200 | |
| 18 Mar | VAT (liability) | £40 | |
| 18 Mar | Trade debtors (asset) | £240 |
The credit note reverses the invoice for the two chairs. March sales fall to £1,000, the customer owes £1,200 and the VAT on the returned chairs comes off the VAT account.
Customer and supplier credit notes
The seller records a sales credit note against sales and trade debtors. The buyer records the same document as a supplier credit note in purchases, reversing the cost and reducing what it owes.
| Date | Account | Debit | Credit |
|---|---|---|---|
| 18 Mar | Trade creditors (liability) | £240 | |
| 18 Mar | Purchases (expense) | £200 | |
| 18 Mar | VAT | £40 |
If the bill was already paid, the supplier account shows a debit balance until the credit is used or refunded. A supplier statement reconciliation is where a missing credit note usually turns up.
Credit note vs debit note vs refund
A credit note reduces what is owed, a debit note increases it, and a refund is money paid back.
| Credit note | Debit note | Refund | |
|---|---|---|---|
| Issued by | Seller | Seller, or a buyer asking for credit | Seller |
| Effect | Reduces the amount owed | Increases the amount owed | Returns money already paid |
| Cash moves | No | No | Yes |
How Briefcase Ledger handles credit notes
Briefcase reads customer and supplier credit notes alongside invoices and receipts, and records each one under its own credit note number. It spots a credit note from negative totals or a CR mark, even on a document titled Invoice.
Once a credit note is approved, Briefcase Ledger posts it as the reverse of an invoice: a sales credit note debits sales and credits trade debtors; a supplier credit note debits trade creditors and credits the cost. You can allocate all or part of it against the contact's outstanding invoices. Open credit notes also come across in an import from Xero, QuickBooks or Sage.
Frequently asked questions
What is a credit note in simple terms?
A credit note is a negative invoice. The seller sends it to say the customer owes less than the original invoice showed, usually because something was returned, cancelled or overcharged.
Is a credit note a debit or a credit?
Both sides are used. The seller debits sales and credits trade debtors, reducing what the customer owes. The buyer debits trade creditors and credits the cost.
Can I delete an invoice instead of issuing a credit note?
Not once it has been sent. Issue a credit note for the full amount so the invoice sequence and the customer's records stay intact.
Do credit notes include VAT?
If the original invoice charged VAT, the credit note normally shows the VAT credited too, so both businesses adjust the VAT.