Definition
A credit note is a document a seller issues to reduce or cancel the amount owed on a previously issued invoice. It is used for returns, overcharges, discounts granted after invoicing, or billing errors. The credit can be refunded or applied against the client's future invoices.
Also called: Credit memo, Credit invoice
Credit note in practice
Because invoices should not be altered once issued, especially after the client has recorded them, the credit note provides a clean audit trail. It references the original invoice number and states the reason for the credit.
Credit notes carry their own sequential numbers. In accounting they reduce revenue and accounts receivable by the credited amount, and any tax originally charged is reversed in proportion.
Example
Invoice INV-0210 billed 12 hours at $90. The client was actually owed a 2-hour reduction, so the seller issues credit note CN-0007 for $180 referencing INV-0210.
Frequently Asked Questions
When should I issue a credit note instead of editing the invoice?
Once an invoice has been sent and the client may have recorded it, issue a credit note. Editing is acceptable only for drafts or invoices the client has not yet received.
Does a credit note mean a refund?
Not necessarily. A credit note reduces what the client owes. If they have already paid, you can refund the amount or let them apply the credit to their next invoice.