Definition
A credit note is a document a seller issues to a customer to reduce or cancel an invoice already issued, for example after goods are returned, a price was overcharged or a discount is granted after the sale. It reverses revenue, the receivable and the related output VAT for the credited amount and must reference the original invoice.
How it works
Never edit or delete an issued invoice; issue a credit note instead, so the numbering and the audit trail stay complete. Tax authorities in VAT countries usually require the credit note to show the original invoice number, the reason and the VAT adjusted.
For the buyer, the same document reduces purchases or inventory, the payable and the deductible input VAT. A debit note works the other way round: the buyer or seller uses it to increase an amount, such as an undercharged price. See how VAT flows through both documents with the VAT calculator.
Example: credit note for returned goods
A customer returns goods invoiced at 1,000 plus 15% VAT. The seller issues a credit note for 1,150 and records the entry below, reducing sales, output VAT and the customer's balance. If the goods go back into stock, a separate entry restores inventory and reduces cost of goods sold.
| Account | Debit | Credit |
|---|---|---|
| Sales returns and allowances | 1,000 | |
| VAT payable (output VAT) | 150 | |
| Trade receivables | 1,150 |