Credit Note Accounting

What is a Credit Note?

What is a Credit Note

A credit note is a document issued to cancel all or part of a sales invoice. In other words, it is a negative invoice. It is also called a credit memo.

A credit note is part of the double entry bookkeeping process and is usually created in an accounting package like QuickBooks.

When Should I issue a Credit Note

There are many reasons for issuing a credit note, including the return of goods, invoiced the wrong customer, damaged goods, a different amount or customer not being happy with the products or services provided.

On the credit memo, the supplier will give as many details as possible. It will generally reference the original invoice, describe the goods or services, quantities, prices and state the reason for the issue.

How to Issue Credit Notes

The easiest way to issue a credit note is to use invoicing software; the feature will be available to issue a credit. If you have issued an invoice, it is always good practice not to amend or delete it but to create a credit note. It will mean that the records are still correct, and the customer has the same paperwork.

Depending on the accounting system used will depend on how you issue a credit note. If you are using an accounting package, there may be an option to issue a credit note directly from the invoice. It will mean that some of the details are posted for you, but you may need to make some adjustments. All accounting packages can create credit notes in their systems. If you are not sure how to issue them, look at the help documents.

Some popular accounting packages include Xero, QuickBooks, and a free version of Pandle, including online invoicing.

Once the document is created, you can leave it until payment is received or allocate it against the invoice. Allocating it against the invoice will reduce the amount of the invoice.

If you are using a manual system, then our free template in Excel is suitable. The template is available for download at the bottom of this page.


What Information Should I include on a Credit Note

The layout of a credit note is very similar to an invoice and you should include as much information as possible.

Here is a list to include on a credit note:

  • The word Credit note
  • Your business information
  • The customer information
  • Unique credit note number
  • Date
  • The original invoice number
  • Description
  • Quantity
  • Amounts
  • Any discounts
  • VAT (if registered)
  • Total amount of the credit note
  • Reason for the credit

Credit Note Example

Below are two examples created using our template. The first sample is to cancel an invoice in full for the return of goods.

The second is for services of 50.00 as the customer was not happy with the work carried out; this is a partial credit.

Credit note example for refund
Credit Note exmaple for return of goods

Credit Note Template

Our free credit note template is designed in Excel and is free to download using the link at the end of the page.

Follow the instructions below to create your own completed form to email or post to your customer:

  • Open the document and create a template by adding your business logo and details.
  • Save this as a template to use again.
  • Once you have created the template enter the rest of the details, including as much information as possible. It is always good practice to reference the original invoice number and includes the reason for issuing the document.
  • Save the credit memo using the document reference number.

Credit Note Accounting Entry

If you use a double-entry accounting system, the double entries will post automatically to the accounts after saving the document. The entries are Debit sales and credit accounts receivables. It will reduce the sales figure and increase the accounts receivable.

A Credit Note for an Unpaid Invoice

If you have had an outstanding invoice and know that the customer will not pay it, a credit memo can be issued to clear the account. Before you issue it, ensure that you have gone down every route to try and receive payment. The invoice can also be written off as a bad debt.

Would you please read our guide on debt collection to find the best ways to contact your customer?

Licence Agreement

To download your free credit note template, you must agree to our licence agreement.

By clicking on the link, you agree to the licence agreement.

Credit Note Conclusion

A credit note is a negative invoice and issued to a company for various reasons including a mistake, overcharged or purchases returned.

A business will usually issue a credit note using accounting software or an Excel Template.