How to Record Credit Notes in Xero (2026 Guide)

Quick answer

To record a credit note in Xero, open the invoice or bill being corrected and choose Add Credit Note from the options menu; Xero mirrors the original lines and tax rates. Approve the credit, then either allocate it against the contact’s open balance or record a cash refund on it. A standalone credit note can also be raised from Business, then Invoices or Bills, using the New Credit Note option.

Sales credits and purchase credits

Xero keeps two mirror-image documents. A sales credit note reduces what a customer owes you, cutting accounts receivable and reversing revenue and output tax. A supplier credit note reduces what you owe, cutting accounts payable and reversing the expense and input tax. Both follow the same lifecycle: create, approve, then settle by allocation or refund. Keeping the direction straight matters most at reconciliation time, because a supplier refund arriving in the bank feed needs a supplier credit note to match against, not a negative bill.

Creating the credit note

The safest origin is the document being corrected:

1. Open the approved invoice or bill.
2. Choose Invoice Options (or Bill Options), then Add Credit Note.
3. Xero pre-fills every line with the original accounts and tax rates. Delete or reduce lines for a partial credit; a credit for two returned units out of ten keeps the same unit price and account, quantity two.
4. Date the credit note when the return or adjustment happened, not the original invoice date. The tax effect lands in the credit note’s period.
5. Approve it.

Standalone credits (raised without an underlying document, for example a goodwill gesture) start from New Credit Note on the sales or purchases screen. Code them to the same account the original revenue or cost went to; parking credits in a miscellaneous account detaches the correction from the thing it corrects.

Allocation

An approved credit sits on the contact’s account as available credit until you point it somewhere. Open the credit note and allocate it against one or more open invoices or bills; the balances drop and no cash moves. Xero also prompts allocation when you open an unpaid invoice for a contact holding credit. Unallocated credits are easy to lose track of: they sit in the contact’s activity while the aged reports keep showing the gross position, and a customer who paid a netted amount will look like a mystery underpayment. When a payment comes in short, check for unallocated credit before chasing.

Refunds

When money actually moves, record the refund on the credit note itself: open it, enter the amount, date, and bank account in the payment fields, and save. The refund then appears for matching when the cash hits or leaves the bank feed. The full patterns, including part-refunds and refunds of overpayments, are in our refunds guide.

Tax effects

A credit note that mirrors its original lines automatically reverses the tax those lines carried, in the credit note’s period. Problems arise when the mirror breaks: a credit raised at a different tax rate than the original, a credit coded to a different account, or a manual negative-line invoice used instead of a credit note. All three make the sales tax or GST return reconcile only with effort. The rule: correct a document with its mirror image, same accounts, same rates, current date.

Common mistakes

• Editing or deleting a sent invoice instead of crediting it, destroying the audit trail a credit note would have preserved.
• Supplier refunds matched against a new negative bill rather than a credit note, which double-counts the expense reversal.
• Credits left unallocated for months, distorting aged receivables and payables.
• Partial credits recalculated by amount instead of quantity, drifting cents away from the original and blocking clean allocation.
• Credit notes dated back into a closed or filed period, silently changing figures already reported. Date them in the open period.

Software that helps

• Xero’s own credit workflow covers the mechanics end to end; discipline about origin documents does the rest.
• ExpenseFlow reduces the need for supplier-side corrections in the first place: bills are extracted, coded correctly, and approved before posting to Xero, so fewer miscoded bills ever need crediting, and the original bill’s document trail is there when a correction does arise.
• Practice review checklists should include an unallocated-credits sweep per client per period.

Related guides

See recording refunds in Xero for the cash side, supplier bills and invoices for the documents credits correct, and the credit note glossary entry for the concept itself.