How a credit note works
An issued invoice should not be edited: it has been sent, and possibly booked, by both sides. When the amount turns out to be wrong, or you agree to give something back, you issue a credit note that refers to the original invoice and states the amount and the reason.
The credit then does one of two things. It reduces the balance of an unpaid invoice, or, if the invoice was already paid, it sits on the customer's account and comes off a future invoice. If the customer wants the money back instead, that is a refund: a separate step that moves cash.
In the United States a credit note is often called a credit memo. It is the same document.
Worked example
A customer was invoiced $1,200 for 12 seats in May, but only 10 people ever had access. You agree to credit the 2 unused seats. The May invoice is already paid, and from June they keep 10 seats.
- May invoice: 12 seats × $100 (paid)
- $1,200.00
- Credit note: 2 seats × $100, reason: billing error
- $200.00
- June invoice: 10 seats × $100
- $1,000.00
- Credit applied to June
- −$200.00
- June amount due
- $800.00
The May invoice stays as it was. The credit note records the correction, and the June invoice shows where the $200 went.
Why credit notes matter
Credit notes keep your books honest. Every correction has its own dated document with a reason, so your accountant can follow what changed and why, and your revenue reports reflect what you actually earned.
They are also the least disruptive way to fix a mistake. A credit on the next invoice settles most billing complaints without a refund, a chargeback or a new payment.
Common mistakes
- Editing or deleting the invoice Changing an issued invoice breaks the record both sides hold. Issue a credit note against it instead.
- Issuing a credit when the customer expects cash If the customer wants money back, account credit will not satisfy them. Say which one you are giving.
- No reason recorded A credit without a reason is hard to explain six months later. Use reason codes, and keep goodwill apart from corrections.