TL;DR

A credit note (or credit memo) is a negative invoice — it cancels or reduces an amount already billed. Use it when you've overcharged a client, when goods are returned, or when a billing error needs to be corrected.

Key Points

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Credit notes should reference the original invoice number they are correcting or reducing

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They maintain a clean paper trail without deleting or altering the original invoice record

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A credit note can cover a partial amount (partial credit) or the full invoice value (full credit)

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Both you and your client must record the credit note in your respective accounting systems

When to Issue a Credit Note

Use a credit note whenever an existing Invoice needs to be reduced after it's been issued. Common scenarios include: billing at the wrong rate, a client returning goods or rejecting part of a service, offering a goodwill discount after a service complaint, or correcting a mathematical error¹. The credit note keeps your accounting records intact — instead of deleting or editing the original invoice (which creates an audit problem), you issue a separate document that offsets the original amount. This preserves a clear history for bookkeeping and tax purposes.

What a Credit Note Should Contain

A proper credit note should include: a unique credit note number, the date of issue, a reference to the original Invoice Number, your business and client details, an itemized breakdown of the credited amount, and the revised balance (if any). Clearly label the document 'Credit Note' or 'Credit Memo' to distinguish it from a standard invoice. If you charge VAT or sales tax, you must also include the tax adjustment so both your records and your client's records remain accurate.

How Credit Notes Affect Your Accounts

From an Accounts Receivable perspective, a credit note reduces the amount your client owes you. If the original invoice was for $1,000 and you issue a $200 credit note, the net receivable becomes $800. If the client has already paid in full, the credit note creates a credit on their account that can be applied to a future invoice or refunded in cash. Record credit notes promptly so your Profit & Loss Statement and receivables reports reflect accurate figures at all times.

References

FreshBooks — What Is a Credit Note? Definition, Examples & How to Issue One ↗

freshbooks.com

FreshBooks — Accounts Receivable: Definition, Examples & How to Manage ↗

freshbooks.com

Last updated: June 9, 2026

Related Terms

Invoice

A document issued by a seller to a buyer that lists goods or services provided, their quantities, and the amount owed as payment.

Invoice Number

A unique identifier assigned to each invoice that makes it easy to track, reference, and reconcile payments between a business and its clients.

Accounts Receivable

Money owed to a business by its customers for goods or services that have been delivered but not yet paid for.

VAT

Value Added Tax — a consumption tax applied at each stage of a supply chain, collected by businesses on behalf of the government and charged to the final consumer.

Sales Tax

A state and local government tax applied to the sale of goods and certain services, collected by the seller at the point of sale and remitted to the relevant tax authority.

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