What a credit note does
A credit note reduces the amount a customer owes on an invoice you have already issued. Instead of editing or deleting the invoice (which breaks your numbering and your records), you issue a separate document that refers to it and states how much is credited and why. Together, the invoice and the credit note show the true amount of the sale.
Typical reasons are goods returned, an overcharge, a discount agreed after the sale, a cancelled order, or damaged or faulty goods.
What to include
- The title “Credit note” and its own number (CN-0001…).
- The date of the credit note.
- The number and, ideally, the date of the original invoice.
- The reason for the credit.
- The items or amounts credited, with tax credited shown separately.
- How the credit is settled: refunded by bank transfer, cash or mobile money, or applied to the next invoice.
How to make one
- Type the original invoice number. If you made that invoice with SmallKits, pick it from the suggestions: the customer and items are filled in for you.
- Remove the lines that are not being credited and reduce quantities for partial returns.
- Choose the reason, and optionally how the credit will be settled.
- Check the “Amount credited” and download the PDF.
Amounts are shown as positive numbers under a clear “Amount credited” total. Credit notes with minus signs on every line confuse people and are easy to misread.
Tax on credit notes
If the original invoice included VAT, GST or sales tax, the credit note should credit the tax too, at the same rate as the original invoice even if the rate has changed since. Turn tax on under Advanced settings and use the rate from the invoice. Your customer will reduce the tax they reclaimed, and you will reduce the tax you owe.
Country notes
United Kingdom: HMRC expects a credit note to show the original invoice number, the amount credited and the VAT credited. EU: credit notes must refer to the invoice they amend. India: GST credit notes must be issued by 30 November following the financial year of the supply, and reported in your GST returns. Kenya: VAT-registered businesses must issue credit notes through eTIMS. In every case, keep the credit note with the invoice in your records.
Credit note or refund?
A credit note is the paperwork; a refund is the money. You can issue a credit note and keep the credit on the customer’s account for their next order, or issue a credit note and pay the money back. Either way, the credit note is what keeps your books right.
Common mistakes
- Changing the original invoice instead of issuing a credit note.
- Crediting more than the original invoice. SmallKits warns you if the credit is larger than the invoice it refers to.
- Forgetting to credit the tax, so your tax return no longer matches.
A worked example
A hotel returns 10 of the 120 towels on invoice INV-0042 because the stitching was faulty. The supplier issues credit note CN-0003 against INV-0042, reason “Damaged or faulty”, with one line: 10 towels at the original price, plus VAT at the original rate. The amount credited is applied to the hotel’s next invoice. Both documents stay in the supplier’s records, and the hotel’s accounts team can match them in a minute because the invoice number is on the credit note.
Checklist before you send
- Is the original invoice number correct?
- Do the quantities and prices match the original invoice, not today’s price list?
- Is the tax rate the one used on the original invoice?
- Have you said how the credit will be settled?
Credit note terms explained
- Original invoice
- The invoice being corrected; its number must appear on the credit note.
- Amount credited
- The total reduction, including any tax credited.
- Applied to next invoice
- The customer pays less next time instead of receiving a refund.
- Partial credit
- A credit for some lines or quantities only, for example 3 of 10 items returned.
If you issue many credit notes for the same reason, such as returns, save your usual wording as the default under Advanced settings so every new credit note starts with it.
Related free tools
- Free invoice generator: for the original invoice.
- Free debit note generator: when you need to increase an invoice instead.
Updated 2026-10-29