Definition
A credit note is a commercial document issued by a supplier to a customer that reduces an earlier invoice. It is used to record refunds, returns, discounts, billing errors, or other adjustments to previously invoiced goods or services. Where the original invoice carried VAT or GST, the credit note carries an equivalent adjustment that reverses or reduces the tax on both sides. Modern accounting platforms generate credit notes from the original invoice with a single action.
What a credit note means in practice
For a bookkeeper, the credit note is the standard tool for handling any post-invoice adjustment. A customer returns goods, the supplier issues a credit note for the value of the returned items. A supplier offers an after-the-fact discount, they issue a credit note for the discount amount. An invoice was raised in error, the supplier cancels it with a credit note. In each case, the credit note posts in the same way: it reduces accounts receivable on the supplier side and reduces accounts payable on the customer side.
The most common credit-note workflow in Xero or QuickBooks: open the original invoice, click “credit note” or “issue credit”, populate the items or amount being credited, and post. The platform creates an offsetting entry that reduces AR (or AP on the buyer’s side) by the credit amount and adjusts the corresponding revenue (or expense) and VAT (or GST) lines. The credit note carries a unique sequential number and references the original invoice.
A practical example: a UK consultancy invoices a client 6,000 (5,000 + 1,000 VAT) on 1 November. The client disputes one piece of the work and the consultancy agrees to a 1,200 discount. On 15 November the consultancy issues a credit note for 1,200 (1,000 + 200 VAT) referencing the original invoice. AR reduces by 1,200; revenue reduces by 1,000; output VAT reduces by 200. The client receives the credit note and pays the net 4,800 by the original Net 30 deadline.
How credit notes work by country
United Kingdom
Credit notes are required to evidence a VAT adjustment under HMRC VAT Notice 700/21. The credit note must include a sequential number, the supplier and customer details, the issue date, a description of the goods or services being credited, the original invoice number, the amount of the adjustment, and the VAT portion shown separately (for full credit notes). The customer must adjust input VAT in the VAT return covering the period the credit note is received; the supplier adjusts output VAT in the period the credit note is issued.
Australia
Australia calls this document an “adjustment note” under section 29-75 of the GST Act 1999, not a “credit note”, though the terms are often used interchangeably in everyday practice. An adjustment note is required to evidence a GST adjustment of more than AUD 75. The mandatory fields are: the words “Adjustment Note” prominently, the seller’s identity and ABN, the issue date, a description of the adjustment, the GST amount being adjusted, and the date or identifying number of the original tax invoice.
New Zealand
New Zealand renamed credit notes to “supply correction information” under the April 2023 GST reforms. The substance is unchanged from the old credit note: supplier issues the correction, customer adjusts input tax accordingly. Documents labelled “Credit Note” under the old rules continue to comply.
Canada
The CRA accepts credit notes (or debit notes issued by the customer) as evidence of a GST/HST adjustment. The supplier reduces output tax in the period the credit note is issued; the customer reduces input tax in the same period. The adjustment is reported on the next GST/HST return.
Singapore
Credit notes are required to evidence a GST adjustment under IRAS section 7.3 of the GST Act. The credit note must show “Credit Note” prominently, the supplier and customer details, the adjustment date, the original invoice number, and the GST adjustment shown as a separate line.
Related terms
The credit note is the inverse of the invoice:
- A debit note is issued by the customer to the supplier to record an upward adjustment (less common).
- An invoice is the original document the credit note adjusts.
- A tax invoice is the version that triggers a tax-adjustment credit note when corrected.
- A sales invoice is a synonym for invoice in UK practice.
- The credit note reduces the accounts receivable balance.
- It also reduces the output VAT recorded on the original invoice.
See also
For the related concept of an upward customer-initiated adjustment, see the debit note entry.
FAQ
See the answered questions above for credit note vs refund, partial-amount credit notes, and VAT/GST adjustment mechanics.