A credit note reduces or cancels an amount previously billed on an invoice. It is issued for returned goods, pricing errors or agreed discounts, and reverses the revenue, VAT and receivable the original invoice raised, in whole or in part.
What it means
A credit note must reference the invoice it adjusts. If VAT was charged on the original invoice, the credit note reverses the matching VAT, so the seller's output VAT and the buyer's input VAT both adjust down.
Where it fits in
Credit notes sit in trade accounting rather than payroll, but they follow the same correction logic payroll uses when a pay run is reversed - undo the original entry rather than just posting a new one on top.
Key rules
- Reduces or reverses a previously issued invoice.
- Must reference the original invoice.
- Reverses VAT proportionally to the amount credited.
- Reduces the seller's revenue and the buyer's payable/receivable.
