A credit note lowers what the customer owes without changing the original invoice, which stays in both parties' records. The customer can set the credit against the invoice it relates to or a later one, or ask for a refund. Until it is used, a credit note sits as a negative balance on the customer's account in accounts receivable.
When to issue a credit note
- Returned or damaged goods. The customer sends goods back or keeps them at a reduced price.
- Invoicing errors. The invoice charged the wrong price or quantity, or items that were never delivered.
- Agreed price reductions. A volume rebate, a goodwill allowance after a complaint or an early payment discount the customer took.
- Cancellations. An order or service invoiced in advance and then cancelled.
- Duplicate invoices. The same delivery billed twice.
A credit note is not the way to write off a debt the customer cannot pay. That goes through bad debt expense, and in the UK the VAT on it is recovered through bad debt relief, because HMRC says a credit note must not be issued for a bad debt.
What a credit note should include
A credit note follows the invoice it corrects, so it carries most of the same details plus a reference back to it.
| Detail | Example |
|---|---|
| Credit note number and date | CN-0217, issued 14 September 2026 |
| Seller and customer names and addresses | As on the original invoice |
| Seller's VAT registration number | As on the original invoice |
| Original invoice reference | INV-1042 dated 1 September 2026 |
| Reason for the credit | 10 units returned damaged |
| Goods or services and quantity | 10 pump housings at £60 each |
| Amount before VAT, VAT rate and VAT | £600, 20%, £120 |
| Total credited | £720 |
In the UK, HMRC expects a VAT credit note within 14 days of the decrease in price. Other countries set their own rules, and some require a corrective invoice instead of a credit note.
Credit note example
Example. Invoice INV-1042 bills 100 pump housings at £60 each, £6,000 plus VAT of £1,200, or £7,200 in total. Ten arrive damaged and go back. The credit note is for 10 × £60 = £600 plus VAT of £120, or £720. The customer now owes £7,200 minus £720 = £6,480 on that invoice, and if it had already paid in full, the £720 would be a credit to use against its next invoice or to refund. All figures are illustrative.
The seller records the credit note by debiting sales returns by £600 and VAT payable by £120 and crediting the customer's account by £720. The buyer debits accounts payable by £720 and credits purchases by £600 and input VAT by £120.
Credit note vs debit note vs refund
| Document | Who issues it | What it does |
|---|---|---|
| Credit note | Seller | Reduces what the customer owes on an invoice |
| Debit note | Usually the seller, sometimes the buyer | From the seller it adds a charge, and from the buyer it claims a reduction |
| Refund | Seller | Returns money already paid, usually after a credit note |
Credit notes in collections and cash application
Missing or unapplied credit notes are a common source of friction in collections. A customer waiting for one will often hold back the whole invoice, and reminders for the full amount only add to the dispute. A credit note that exists but sits unapplied makes the account look more overdue than it is.
Customers often deduct credit notes from what they pay and list them on their remittance advice. In the example, a payment of £6,480 together with CN-0217 closes INV-1042, which is why cash application has to match credit notes as well as payments. A monthly statement of account shows the customer the same credits you see.
Sunbay keeps each customer reply next to the invoice it concerns, so when a customer says it is waiting for a credit note, whoever handles the account sees it, and Sunbay can create a task for your team to sort it out. It pulls invoices and payments from your ERP or accounting system and stops reminders once an invoice is paid. See how automated reminders and escalations work.
Frequently asked questions
Is a credit note the same as a refund?
No. A credit note reduces what the customer owes, and a refund returns money it has already paid. A refund usually follows a credit note when the customer has nothing left to set the credit against.
What is the difference between a credit note and a credit memo?
None in substance. Credit note is the usual term in the UK and much of the world, and credit memo, short for credit memorandum, is the usual term in the US.
Can you issue a credit note for an invoice that is already paid?
Yes. The credit then becomes a balance in the customer's favor, which you set against its next invoice or refund.
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