Credit Notes
This guide explains how to use Credit Notes to reduce the amount a customer owes you. Whether dealing with product returns, price corrections, or invoice cancellations, Credit Notes help maintain accurate financial records.
What is a Credit Note?
A Credit Note is a document that reduces the amount a customer owes your business. Think of it as the opposite of an invoice—instead of asking for money, you're reducing what they owe.
Common reasons to issue a Credit Note:
| Reason | Example |
|---|---|
| Customer Returns | Customer returns 2 defective laptops |
| Price Correction | Original invoice had wrong price (too high) |
| Discount Applied Later | Agreed 10% discount after invoice was posted |
| Invoice Cancellation | Customer cancelled order after invoicing |
| Quantity Adjustment | Delivered 8 items but invoiced 10 |
Accounting Impact: A posted Credit Note decreases revenue and reduces accounts receivable (the amount customers owe you).
Where to Find It
Navigate to: Accounting → Adjustment Documents
When creating a new Adjustment Document, select Credit Note as the type.
[!TIP] Credit Notes in this system are a type of Adjustment Document. This unifies all corrections (credit notes, debit notes, miscellaneous adjustments) in one place for easier management.
Credit Note Workflow
Your credit note goes through these stages:
┌─────────┐ ┌─────────┐ ┌─────────┐ │ Draft │ ──▶ │ Posted │ ──▶ │ Applied │ └─────────┘ └─────────┘ └─────────┘ 📝 ✅ 💰
📝 Draft
- You can edit all details
- No accounting impact yet
- Safe to delete if not needed
✅ Posted
- Locked for editing
- Journal entry created
- Reduces customer's outstanding balance
- Ready to be applied to invoices or refunded
💰 Applied
- Credit has been used to reduce an open invoice
- Or refund has been issued to customer
Creating a Credit Note
Step 1: Start the Credit Note
- Go to Accounting → Adjustment Documents
- Click Create Adjustment Document
- Select Credit Note as the Type
Step 2: Fill in the Header
| Field | What to Enter | Example |
|---|---|---|
| Type | Select "Credit Note" | Credit Note |
| Customer | Who is receiving the credit | ABC Company |
| Currency | Same as original invoice | USD |
| Date | Date of the credit note | Today's date |
| Original Invoice | Link to the invoice being corrected (optional) | INV-2024-001 |
| Reason | Why you're issuing this credit | "Return of 2 defective items" |
[!IMPORTANT] Linking to the original invoice helps with tracking and audit trails, but is not mandatory.
Step 3: Add Line Items
Click Add Line Item and enter:
| Field | Description | Example |
|---|---|---|
| Product | Item being credited | Laptop Model X |
| Description | Detail of the credit | "Return - defective screen" |
| Quantity | Number of items | 2 |
| Unit Price | Price per item | 500.00 |
| Account | Revenue account (auto-filled) | Sales Revenue |
| Tax | If tax was on original invoice | 10% VAT |
Amounts will be negative to indicate a reduction.
Step 4: Review and Post
Before clicking Post, verify:
- Customer is correct
- Line items match what's being credited
- Amounts and taxes are accurate
- Reason is documented for auditing
Click Post to finalize the credit note.
What Happens Behind the Scenes
When you post a credit note for a $1,000 return (with 10% tax), the system creates:
┌─────────────────────────────────────────────────────────────┐
│ Dr. Sales Revenue $1,000.00 │
│ Dr. Sales Tax Payable $100.00 │
│ Cr. Accounts Receivable $1,100.00 │
└─────────────────────────────────────────────────────────────┘
In plain English: We're reversing the original sale—decreasing our recorded revenue and reducing what the customer owes us.
Applying a Credit Note
Once posted, you have two options for the credit:
Option 1: Apply to Open Invoice
The credit reduces the customer's outstanding invoice balance.
Example: Customer has $5,000 open invoice. You issue $1,100 credit note.
- New balance: $5,000 - $1,100 = $3,900 remaining
Option 2: Issue Refund
If the customer has no open invoices (or prefers cash back):
- Create a Payment (outbound)
- Link it to the credit note
- Record payment via bank transfer, cash, or check
Common Scenarios
Scenario 1: Customer Returns Defective Items
The Situation: A customer bought 10 laptops at $500 each. Two were defective and returned.
What to do:
- Create a new Adjustment Document → Type: Credit Note
- Select the customer
- Link to the original invoice (optional)
- Add line:
- Product: Laptop
- Quantity: 2
- Price: $500
- Tax: Same as original invoice
- Reason: "Return of 2 defective units - RMA #12345"
- Post the credit note
Result:
- Customer's balance reduced by $1,100 (including tax)
- Sales revenue decreased by $1,000
- Tax liability reduced by $100
- If storable products: Inventory stock increased by 2 units
Scenario 2: Price Correction
The Situation: You invoiced a customer $200/unit but the agreed price was $180/unit for 50 units.
What to do:
- Create a Credit Note
- Calculate difference: ($200 - $180) × 50 = $1,000
- Add line with the price difference
- Reason: "Price correction per agreement dated [date]"
- Post
Scenario 3: Full Invoice Cancellation
The Situation: Customer cancelled order but invoice was already posted.
What to do:
- Create a Credit Note for the full amount of the original invoice
- Link to the original invoice
- Copy all line items (or add manually)
- Reason: "Order cancelled - customer request"
- Post
The credit note fully offsets the original invoice.
Multi-Currency Credit Notes
When the original invoice was in a foreign currency:
- Use the same currency as the original invoice
- System captures the current exchange rate
- Currency conversion handled automatically
- Exchange differences recorded if rates changed
Best Practices
✍️ Document Everything
Always include a clear Reason explaining why the credit was issued. Future auditors (and future you) will appreciate it.
🔗 Link to Original Documents
When possible, link the credit note to the original invoice. This creates a clear audit trail.
📋 Use Reference Numbers
Include RMA numbers, customer complaint IDs, or other tracking references in the description.
📊 Review Before Posting
Once posted, credit notes cannot be edited. Double-check all amounts before confirming.
🔒 Monitor Unusual Activity
Large or frequent credit notes should be reviewed by management to prevent fraud.
Troubleshooting
"Cannot Post" Error
Check:
- Are all required fields filled?
- Does the date fall within an open accounting period?
- Is the currency valid and active?
Credit Note Not Reducing Balance
Check:
- Was the credit note posted (not just saved as draft)?
- Is it linked to the correct customer?
- Has it been applied properly?
Tax Calculation Wrong
Check:
- Is the same tax rate used as the original invoice?
- Check the customer's fiscal position settings
- Verify product tax configuration
Related Documentation
- Customer Invoices - Creating and managing invoices
- Adjustment Documents - General adjustment document guide
- Payments - Processing refunds and payments
Credit Notes are essential for maintaining accurate financial records when dealing with returns, corrections, and cancellations. By properly documenting each credit, you ensure clean audit trails and accurate customer balances.