A credit note (also called a credit memo or credit memorandum) is a commercial document a seller issues to a buyer to reduce or cancel the amount owed on a previously issued invoice. Instead of deleting or editing an invoice that has already been sent — which breaks your numbering sequence and can cause problems in an audit — you issue a credit note that formally records the correction.
Think of it as the mirror image of an invoice: where an invoice says “you owe me this much,” a credit note says “I owe you this much back,” either as a refund or as credit against future purchases.
When should you issue a credit note?
Credit notes exist to fix real-world situations where the original invoice no longer reflects what the customer should pay. The most common triggers are:
- Returned goods — the customer sends back damaged, faulty, or unwanted products.
- Overbilling — the invoice charged the wrong quantity, the wrong rate, or duplicated a line item.
- Post-invoice discounts — you agree a discount or goodwill gesture after the invoice was sent.
- Cancelled orders or services — work was invoiced but later cancelled in full or in part.
- Pricing errors — the wrong price list or tax rate was applied to the original invoice.
What must a credit note include?
A credit note follows almost the same format as an invoice, which is why most businesses generate both from the same tool. To be valid and easy to reconcile, your credit note should contain:
A unique credit note number (its own sequence, e.g. CN-0001), the issue date, your business name and contact details, the customer’s details, a clear reference to the original invoice number and date, a description of the goods or services being credited, quantities and unit prices, the tax amount being reversed, and the total credit amount. Marking the document clearly as “Credit Note” — not “Invoice” — matters, because the two have opposite accounting effects.
If you want to skip the formatting work, our free credit note generator produces a correctly structured PDF with all of these fields, and the credit note template page explains each field in more detail.
Credit note vs refund: what is the difference?
A refund returns money to the customer; a credit note is the document that authorizes and records that adjustment. In practice a credit note can be settled two ways: as a cash refund (you pay the customer back) or as account credit (the amount is offset against the customer’s next invoice). Many B2B relationships prefer account credit because it avoids moving money twice when the parties trade regularly.
Either way, the credit note is what keeps your books consistent: your sales ledger shows the original invoice at full value plus a matching credit, rather than an invoice that mysteriously changed after being issued.
How credit notes affect tax and accounting
Because an invoice usually records revenue and tax collected, a credit note reverses part or all of both. If you charged sales tax, VAT, or GST on the original invoice, the credit note should show the tax portion being credited at the same rate, so your tax return nets off correctly. Most jurisdictions require you to keep credit notes with the same rigor as invoices — sequentially numbered and retained for the statutory period.
This is also why you should never delete an issued invoice to fix a mistake. Deleting breaks the audit trail; a credit note preserves it while still correcting the customer’s balance.
How to create a credit note step by step
Creating a credit note takes a few minutes once you know the original invoice you are correcting:
- Open the original invoice and confirm exactly which lines and amounts need crediting.
- Start a new credit note with its own sequential number and today’s date.
- Reference the original invoice number so both documents can be matched later.
- List the credited items with quantities, unit prices, and the tax being reversed.
- State whether the credit will be refunded or applied to the customer’s account.
- Send the credit note to the customer and keep a copy with your invoicing records.
Create a credit note in your browser — free
You can issue a professional credit note right now with the FreeInvoice credit note generator. Fill in your details, add the credited items, and download a branded PDF to send to your customer — no signup and no cost. If you also need to reissue a corrected bill, the free invoice generator uses the same editor, and our guide on how to make an invoice walks through every field.