What is Credit Note?
A credit note is a document issued by a seller to reduce the amount a buyer owes, typically for returned goods, overcharges, or discounts.
A credit note (also called a credit memo) is a document issued when a seller needs to reduce the amount a customer owes. It's essentially a "negative invoice" that adjusts a previous invoice without voiding it entirely.
- **When to issue a credit note:**
- Returned goods: Customer returns items for a refund
- Overcharges: Original invoice had incorrect (higher) amounts
- Damaged goods: Partial refund for items damaged in transit
- Agreed discounts: Retrospective discounts or loyalty credits
- Cancelled services: Refund for services not rendered
UK legal requirements: Credit notes must reference the original invoice number and include the same details as a standard invoice. For VAT-registered businesses, credit notes must show the VAT being credited back.
Important: You cannot simply delete an invoice - HMRC requires an audit trail. Always issue a credit note to reverse or adjust invoices.
Examples
A supplier issues a credit note for returned faulty products
A contractor credits a client for work not completed
An agency issues a credit note for an overcharged project
Related Terms
Invoice
An invoice is a commercial document issued by a seller to a buyer, listing the products or services provided and requesting payment.
Proforma Invoice
A proforma invoice is a preliminary bill sent before goods are delivered or services are completed, showing the estimated costs and terms.
Remittance Advice
A remittance advice is a document sent by a payer to inform the recipient which invoices are being paid by a specific payment.
Put This Into Practice
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