Credit Notes
Reduces the amount a customer owes. DR Revenue + DR Tax, CR AR.
A credit note reduces the amount a customer owes. It is the formal mechanism for correcting an invoice — whether due to returned goods, a billing error, a price adjustment, or a goodwill reduction. When posted, a credit note reverses revenue and tax previously recognized on the original invoice.
Use Cases
| Use Case | Why |
|---|---|
| Customer returns goods | Reverse the revenue and restore inventory to stock |
| Invoice was overbilled | Correct the price without voiding and reissuing the full invoice |
| Goods delivered were damaged or incorrect | Partial reduction for quality issues accepted by the customer |
| Promotional adjustment after invoicing | Apply a post-invoice discount agreed with the customer |
| Tax correction on a posted invoice | Fix a tax rate or amount applied incorrectly |
Creating a Credit Note
From an Invoice (Recommended)
Navigate to: Sales → Invoices → open the invoice → More → Convert to → Credit Note, or the invoice's Lifecycle panel → Returns → Create credit note
The form pre-populates with the original invoice's customer, line items, prices, and tax rates. Edit the quantities or amounts to reflect what is being credited. You do not need to credit the full invoice — partial credit notes are supported. The link to the source invoice is kept, so the credit note appears under the invoice's Returns.
Standalone Credit Note
Navigate to: Sales → Invoices → Credit Notes tab → New
Select the customer and enter line items manually. A standalone credit note is not linked to a specific invoice; cash application applies it to the customer's open invoices after posting.
Form Fields
| Field | Details |
|---|---|
| Customer | Required. Pre-filled if created from an invoice. |
| Date | Required. Date the credit note is issued. |
| Items | Same structure as invoice line items: Item, Qty, Rate, Discount, Tax, Amount. |
| Subject, PO Number, Tags, Project, Note, Attachments | Optional fields, revealed by their pills. Use Note for the reason the credit was issued — it is internal and not printed. |
| Center/Location | Shown when the business has centers. |
Status Lifecycle
| Status | Meaning |
|---|---|
| Draft | Saved without posting. No financial impact. |
| Issued | Posted. Revenue and tax reversed, AR reduced. Shown until the credit has a posted journal to measure against. |
| Unapplied | Posted, but none of the credit has been applied to an invoice yet. |
| Partly applied | Some of the credit has been applied; the rest remains on the customer account. |
| Fully applied | The whole credit has been applied to invoices. |
| Voided | Reversed. Remains in the system for audit. |
Applying a Credit Note
There is no Apply button. Credit application is automatic and continuous: cash application runs when the credit note posts, whenever the customer page is opened, and on a worker sweep every 20 minutes. Opening balances are settled first, then the oldest invoice by its own invoice date, each exhausted in full before the next receives anything.
Click Save. The credit note is Issued and its journal is written.
The credit note page shows Credit total, Applied and Remaining credit, and an Applied to list linking every invoice the credit settled.
An invoice cleared partly or wholly by credit shows Credits applied and a Settled by list. An invoice cleared entirely by credit reads Settled rather than Paid.
If the credit is not applied to any invoice, it remains as an open credit on the customer account: the customer page shows "This customer is in credit by …", and the credit can be paid back with More → Convert to → Customer Refund.
Journal Entries
Revenue Reversal (all credit notes)
| Account | Debit | Credit | Description |
|---|---|---|---|
| Sales Revenue | 3,000 | — | Revenue reversed — net amount |
| Sales Tax Payable | 210 | — | Output tax reversed |
| Accounts Receivable | — | 3,210 | Customer balance reduced |
Inventory Reinstatement (product items only)
When product lines are credited, the credit note also reinstates inventory and reverses the cost of sale.
| Account | Debit | Credit | Description |
|---|---|---|---|
| Inventory Asset | 1,500 | — | Stock returned at weighted average cost |
| Cost of Sales | — | 1,500 | Cost of sale reversed for returned items |
A credit note is an additive document — it creates new journal entries that offset the original. The original invoice remains in the system, visible in the ledger and in the customer's history. If you need to fully cancel an invoice, void it instead. Voiding is appropriate when the invoice was never delivered or accepted. A credit note is appropriate when the invoice was valid but the amount needs to be reduced after the fact.
Related
- Giving the money back rather than reducing the debt: Customer refunds.
- Why a credit note is not a void: Editing, voiding and restoring.
- Applying the credit to an invoice: Matching a receipt to invoices.
- The invoice being credited: Invoices.