What Is a Credit Note? Example, Template and GST Rules

A credit note is a document a supplier issues to reduce or cancel the amount a customer owes on an invoice you've already sent. You use one when you've overcharged, the client returned something, part of the job was cancelled, or you agreed a discount after invoicing. The original invoice stays as it is; the credit note sits alongside it and reduces the balance.

That last point is the one people get wrong. Once an invoice has been sent, you shouldn't edit or delete it. You issue a credit note instead, so your records, your client's records and your tax figures all still add up.

What is a credit note?

A credit note (called a credit memo in the US) is a formal record that the supplier owes the customer a credit against an earlier invoice. It has its own number and date, refers to the original invoice, and shows the amount being credited, including any GST or tax.

What happens to the credit next depends on whether the invoice has been paid:

• Not yet paid: the credit reduces what the client owes.
• Already paid: you either refund the credit amount, or hold it on the client's account and take it off their next invoice.

A credit note is issued by the seller. A buyer can't issue a credit note to themselves; if a buyer wants a credit, they ask for one, sometimes with a document of their own called a debit note.

When to issue a credit note

• You overcharged: wrong rate, wrong quantity or a duplicate line.
• The client returned goods, or rejected faulty work.
• Part of the job was cancelled after you'd invoiced it.
• You agreed a discount or goodwill reduction after the invoice went out.
• You invoiced the wrong client or invoiced twice; a full credit note cancels the incorrect invoice.

If you haven't sent the invoice yet, just fix it. Credit notes are for invoices the client has already received.

Credit note, refund, void or debit note: which do you need?

A note on "debit note": it has two meanings. A buyer may send a debit note to ask a supplier for a credit, or a seller may issue one to increase an earlier invoice. If you undercharged, a separate invoice for the difference is usually clearer for small businesses.

Credit note example

A sole trader invoices a client $1,100 including $100 GST for 10 hours of work at $100 an hour plus GST. The client queries 2 hours, and the sole trader agrees. The credit note is $220 including $20 GST:

What happens next depends on where the invoice is at:

• Before payment: the client now owes $880 ($1,100 less $220).
• After payment, refunded: the client paid $1,100, so you refund $220.
• After payment, held as credit: the $220 sits on the client's account and comes off their next invoice.

Tell the client which of these you're doing, in the credit note itself or the email it goes with. "Is this a refund or a credit?" is the most common follow-up question.

What to include on a credit note

• The words "Credit note" (in Australia, "Credit note / adjustment note" if you're GST-registered; see below).
• A unique credit note number in its own sequence, such as CN-001.
• The date you issue it.
• Your business details, including your ABN or tax number.
• The customer's details.
• The original invoice number and date it relates to.
• What's being credited and why: description, quantity, price.
• The amount credited, the tax (GST or VAT) on it, and the total.
• What happens next: refund, applied to the balance, or held against future invoices.

Use a separate sequence for credit notes rather than reusing invoice numbers. It keeps both sequences unbroken and makes a client's account easy to follow.

Credit notes and GST in Australia: adjustment notes

If you're registered for GST in Australia and you reduce the price of a sale after issuing a tax invoice, the GST on that sale changes too. The GST law calls the document that records this an adjustment note. "Credit note" is just the everyday name; a credit note works as an adjustment note only if it makes clear it's intended to be one and contains the required details. Under the ATO's 2022 determination, an adjustment note must contain, or let the reader clearly work out:

1. that it's intended to be an adjustment note, and whether the adjustment increases or decreases the amount;
2. your identity, including your ABN;
3. your customer's identity or ABN, if the original tax invoice was for $1,000 or more;
4. the date it was issued;
5. a brief explanation of the reason for the adjustment;
6. the amount of the GST adjustment (or, where GST is 1/11 of the price, a statement that the price difference includes GST);
7. the difference between the price before and after the change.

You must give the customer an adjustment note within 28 days if they ask for one, and you generally need to hold one before claiming the GST decrease on your BAS. You don't need one at all if the GST adjustment is $75 or less. In practice, head the document "Credit note / adjustment note", quote the original tax invoice number, and show the GST credited separately. If you're not registered for GST, you're simply crediting the price; there's no GST to adjust. Sources: ATO, adjustment notes; GST Act s29-75.

A bad debt is different: if a client never pays, you don't issue a credit note. A GST-registered business on accrual (non-cash) accounting can claim back the GST once the debt is written off or has been overdue for 12 months.

Credit notes in the UK, EU and US

• UK: a VAT credit note must show its own number and date, your name, address and VAT number, the customer's name and address, the number and date of the original VAT invoice, a description of what's being credited, and the reduction amount excluding VAT.
• EU: under the VAT Directive, a document that amends an earlier invoice must specifically refer to that invoice, which is why credit notes always quote the original invoice number.
• US: there's no federal VAT or GST, so a credit memo is mainly an accounts-receivable record. If you charged state sales tax, the credit should reduce the tax too; state rules apply.

How a credit note shows on a statement of account

On a statement of account, a credit note appears as a negative line that reduces the running balance, usually with a reference to the invoice it relates to. If a client paid in full before the credit was issued, the statement shows an unused credit, a negative balance, until you refund it or apply it to their next invoice. Clear up unused credits before year-end so neither side is left with an unexplained balance.

Common credit note mistakes

• Editing or deleting an invoice you've already sent instead of issuing a credit note.
• Crediting more than was invoiced, including GST you never charged.
• Not referencing the original invoice, which makes reconciliation hard for both sides.
• Not saying whether it's a refund or a credit, so the client deducts it from an unrelated payment.
• Leaving unapplied credits sitting on client accounts for months.

Credit note template

CREDIT NOTE                                  No. [CN-...]
[Your business name] · ABN/tax ID [number] · [email]

To: [Customer name], [address]
Date: [date]
Relates to invoice: [INV-...] dated [date]

Description                         Qty     Price      Amount
[What is being credited]            [ ]     [ ]        [ ]

Subtotal credited:                  [amount]
GST/tax credited:                   [amount]
Total credit:                       [amount]

Reason: [overcharge / return / cancelled work / agreed discount]
This credit will be: [refunded to you on (date) / applied to invoice (number) / held against your next invoice]

InvoiceSonic keeps each client's invoices, payments and history together, so you can see at a glance what's been invoiced, paid and credited. Use the free invoice generator for your next invoice, or see correcting an invoice without GST if you charged GST by mistake.

Frequently asked questions

What is a credit note?
A credit note is a document a supplier issues to reduce or cancel the amount owed on an invoice already sent to a customer. It refers to the original invoice and shows the amount credited, including any tax.

Is a credit note a refund?
No. A credit note records that the client is owed a credit. A refund is the money actually paid back. If the invoice hasn't been paid, the credit simply reduces what's owing and no refund is needed.

Who issues a credit note, the buyer or the seller?
The seller issues a credit note. A buyer who believes they've been overcharged asks the seller for one, sometimes by sending a debit note.

What's the difference between a credit note and a debit note?
A credit note reduces what the customer owes. A debit note either requests a credit (when sent by a buyer) or increases an amount owed (when issued by a seller). For small businesses, a new invoice for any extra amount is usually clearer than a debit note.

Can I just edit or delete the invoice instead?
Only if you haven't sent it yet. Once the client has the invoice, issue a credit note so both sets of records match and your tax figures stay correct.

Can I issue a credit note after the client has paid?
Yes. Issue the credit note, then either refund the amount or hold it as a credit against the client's next invoice, and tell the client which you're doing.

Does a credit note need to refer to the original invoice?
It should. Quoting the original invoice number and date is required for VAT credit notes in the UK and EU, and it's what lets both you and your client reconcile the account.

Do credit notes expire?
A credit note itself doesn't usually carry an expiry date, but you should agree with the client how an unused credit will be used or refunded, and clear old credits from your accounts regularly.