What is a credit note in simple terms?

A credit note is a document the seller issues to reduce the amount a buyer owes on an invoice, in whole or in part. It works like a negative invoice and is used for returns, overcharges, post-sale discounts or cancellations. It corrects the record without deleting the original invoice.

Who issues a credit note, the buyer or the seller?

The seller issues the credit note to the buyer, the same direction as an invoice. The seller is the one lowering what is owed. A debit note goes the other way in two cases: a buyer can issue one to tell a supplier they are deducting an amount (for example for returned goods), and a seller can issue one to add an amount they undercharged.

What is the difference between a credit note and a refund?

A credit note is a paperwork adjustment that lowers what a buyer owes. A refund is actual money returned to a buyer who had already paid. If the invoice is unpaid, a credit note alone usually settles it; if it was paid, you typically issue a credit note and then refund the money or carry it as credit.

Does a credit note mean money is returned?

Not on its own. A credit note adjusts the amount owed on the record. Whether cash moves depends on whether the client had paid: if they had not, the credit just reduces their balance; if they had, you issue a refund or apply the credit to a future invoice.

How do I number a credit note?

Give each credit note its own unique number, ideally in a separate short series such as CN-2026-0001, and reference the original invoice number on it. Keeping credit notes in their own sequence makes them easy to tell apart from invoices and keeps your records clean. See our guide on numbering invoices.

Getting paid20 October 2026·7 min read·Written by Remit Team

What Is a Credit Note?

You sent an invoice, the client paid or was about to, and then something changed: goods came back, you overcharged, or you agreed a discount after the fact. You cannot just quietly edit an invoice you have already issued. The clean, correct fix is a credit note. Here is what a credit note is, who issues it and when, what goes on one, how it differs from a refund and a debit note, and a simple template you can copy. This is general business information, not accounting or legal advice.

A business owner checking figures on a calculator to issue a credit note correcting an invoice

What a credit note actually is

A credit note (sometimes called a credit memo) is a document the seller issues to the buyer to reduce the amount owed on an invoice, in part or in full. It is, in effect, a negative invoice: where an invoice says "you owe me this," a credit note says "cancel this much of what you owed me."

The direction matters and it is the same as an invoice: you, the seller, issue the credit note to your customer. It either wipes out an invoice that should not have been charged, or trims it down to the correct amount. Crucially, it does not necessarily move any money on its own, it adjusts the record. Whether cash actually changes hands depends on whether the client had already paid (see refunds below).

The golden rule behind all of this: once an invoice has been issued to a client, you never delete or rewrite it. (A draft you never sent can still be voided or edited.) A sent invoice stays in the records exactly as it went out, and the credit note is the separate document that corrects it. That is what keeps your numbered sequence and your books honest and easy to audit.

When do you issue a credit note?

A credit note is the right tool whenever an already-issued invoice needs to come down in value. The common triggers:

Returned or rejected goods. The client sends back part of an order, so you credit that portion.
An overcharge or billing error. You invoiced the wrong quantity, price or tax, and need to correct it downward.
A post-invoice discount. You agreed a goodwill reduction or an early-payment discount after the invoice went out.
A cancelled order. Work or goods invoiced but no longer going ahead.
Damaged or faulty delivery. You credit the affected items rather than argue over the whole bill.

If instead the invoice was too low (you undercharged), you do not use a credit note. You either issue a new invoice for the difference, or in some systems a debit note, covered below.

Credit note vs refund vs debit note

These three get tangled together, so here is the clean split:

Document	Who issues it	What it does
Credit note	Seller (you)	Reduces what the buyer owes on an invoice
Refund	Seller (you)	Actually returns money the buyer already paid
Debit note	Buyer, or seller	Buyer version: tells the supplier "we are deducting this" (often for returned goods), usually prompting a credit note. Seller version: adds to the bill after an undercharge

The key distinction is credit note versus refund. A credit note is a paperwork adjustment that lowers the buyer's balance (and, in your books, your accounts receivable). A refund is money actually leaving your account. If the client had not paid yet, a credit note alone is usually enough, it just lowers what they owe. If they had already paid, you typically issue a credit note to correct the record and then make a refund (or let the credit sit against their next invoice, if you both agree). A quick worked note on tax: if your 500 invoice was before 20 percent VAT (so 600 in total), crediting 2 mugs means a credit note of 100 plus 20 VAT = 120, the client now owes 480, and your VAT return for that period drops by 20. Sales-tax rates vary (for example 20 percent UK, 15 percent South Africa, 14 percent Botswana, and none if you are not registered), so check your own.

What to put on a credit note

A credit note looks a lot like an invoice, which makes it easy to produce. Include:

The words "Credit Note" clearly at the top, so nobody mistakes it for an invoice.
A unique credit note number, ideally in its own short series such as CN-2026-0001, so credit notes are easy to tell apart from invoices.
The date, and a reference to the original invoice number it relates to. This link is the whole point.
Your details and the client's details.
The line items being credited, with the amount and the reason (for example, "2 units returned").
The total credited, including any tax. Some systems print it as a negative figure (-100.00), others as a positive amount under a clear "Credit Note" heading; either is fine as long as it cannot be mistaken for a bill.

If you are registered for VAT or a similar sales tax, the credit note also adjusts the tax you reported, so make sure the tax line is correct. Rules vary by country, so check your local requirements if tax is involved.

A worked example

Say you invoiced a client 500 for 10 branded mugs (invoice INV-2026-0042). Two arrive chipped, so you agree to credit them. Each mug is 50, so you issue a credit note for 100: credit note CN-2026-0003, dated today, referencing INV-2026-0042, one line "2 mugs returned, damaged, at 50 each = 100."

If the client had not yet paid, their balance simply drops from 500 to 400. If they had already paid the full 500, the credit note records the 100 adjustment and you either refund 100 or carry it as a 100 credit against their next order, whichever you agree. Either way, the original invoice stays untouched at 500, and the credit note explains the difference.

A simple credit note template

If you need one right now, this is all it has to say:

"Credit Note CN-[number], dated [date]. From [your business] to [client]. Relates to invoice [original invoice number]. Credited: [item/description, quantity, amount] because [reason]. Total credit: [amount and currency, including tax]. This reduces the above invoice by the total credit shown."

You do not need special software to produce one. With Remit's free invoice generator you can create a clean, numbered document, label it a credit note, reference the original invoice, and download a branded PDF, so your corrections look as professional as your invoices and your records stay tidy. Keep the credit note on file alongside the invoice it corrects, and your books will always reconcile.