What is a credit note?

A credit note is the clean way to correct an invoice. You do not edit or delete the original, which stays on record. You issue a second document that cancels all of it or part of it. It is sometimes called a credit memo.

This is a general explanation, not accounting or tax advice. Rules for credit notes, especially on sales tax, differ by country.

Why credit notes matter

Product sales go wrong in ordinary ways. A pallet arrives damaged, a drum is short, the price was billed from an old list. Each leaves the buyer with an invoice that is too high.

A credit note fixes that on paper. Both sides can see what was agreed, the ledger balances and nobody argues about a number scribbled in an email.

When to issue a credit note

• Returned goods. The buyer sends back some or all of an order.
• Damaged or short delivery. You agree to credit the part that did not arrive in good order.
• Price correction. The invoice used the wrong price or discount.
• Billing error. A wrong quantity, a wrong product or a duplicate invoice.
• Goodwill. A discount agreed after the sale, for example to settle a complaint.

What a credit note shows

• The word "credit note" and its own number.
• The date and both parties' details.
• The number and date of the invoice it relates to.
• The lines and amount being credited, and the reason.
• Any tax credited, if tax applied to the original invoice.

Credit note, refund and debit note

A credit note reduces what the buyer owes you. A refund sends money back. Often the credit note comes first, and the refund follows if the buyer has already paid.

A debit note is the opposite document. It increases what a buyer owes, for example when you under-billed. Buyers also send debit notes to ask a seller for a credit.

An example from product sales

Say a distributor invoices $9,600 for 40 drums of resin. Two drums arrive damaged. The buyer sends photos and the distributor agrees to credit them at $240 each.

It issues a credit note for $480 against the invoice. The buyer now owes $9,120. If it had already paid in full, the $480 is either refunded or kept as credit against its next order.

1. 1

   Confirm the problem

   Check photos, delivery notes or the returned goods before you agree anything.

2. 2

   Agree the amount in writing

   Say what is credited and whether it is a refund or credit against a later order.

3. 3

   Issue the credit note

   Refer to the original invoice number and give the credit note its own number.

4. 4

   Record it and tell the buyer

   Send the credit note and note the change in the buyer's account history.

Related terms

• Commercial invoice: the document a credit note corrects.
• Pro forma invoice: the advance invoice that is not a demand for payment.
• Net 30: the payment term that usually applies to the invoice.
• Credit limit: not the same thing: it caps what a customer may owe.
• Sales order: the order the original invoice came from.

For late invoices, see how to chase overdue payments.

How PromptLab handles it

PromptLab has no credit note document of its own. An invoice can be created from a sales order, or on its own, and it is linked to the customer's account, like the quote and the sales order. The account also holds the files and the email, WhatsApp and Telegram history. Keep the credit note and the buyer's photos in the account's Files tab and log the agreement as a note, so anyone on the team can see why the number changed.

Frequently asked questions

What is a credit note in simple terms?

It is a document that lowers the amount a customer owes on an invoice. You issue it for returns, damage, pricing errors or other agreed reductions.

Is a credit note the same as a refund?

No. A credit note reduces what the buyer owes or becomes credit for a later purchase. A refund is a payment back to the buyer.

Can I just edit the original invoice?

It is better not to. Once an invoice has been sent, issue a credit note and, if needed, a new invoice. That leaves a clear record.

What is the difference between a credit note and a debit note?

A credit note lowers what the buyer owes. A debit note raises it, for example when an invoice was too low.

Does a credit note need to refer to an invoice?

Yes. It should quote the original invoice number and date, so both sides can match the two documents.