Credit Note vs Debit Note: What Each One Does and When to Issue It
Invoices go wrong. A price is misquoted, three units arrive damaged, a delivery charge is left off. Once an invoice has been sent, the clean way to fix it is not to edit the original but to issue a second document that adjusts it.
Quick answer: a credit note reduces the amount a customer owes on an invoice, for example after a return, an overcharge or a discount agreed after the sale. A debit note increases the amount owed, for example after an undercharge. Both reference the original invoice, so the record shows what changed and why.
What is the difference between a credit note and a debit note?
The simplest way to remember it: a credit note takes away from an invoice, a debit note adds to it. Neither replaces the original. The original invoice stays in the records exactly as issued, and the adjustment document sits alongside it.
What is a credit note?
A credit note (called a credit memo in some countries, including the US) is a document a seller issues to reduce or cancel an amount previously invoiced. Common reasons:
- Goods returned, or damaged in transit.
- An overcharge: wrong price, wrong quantity, or a duplicate invoice.
- A discount or rebate agreed after the invoice was sent.
- A service cancelled after it was billed.
If the customer hasn't paid yet, the credit note reduces what they owe. If they have paid, the credit can be refunded or held on their account against the next invoice.
What is a debit note?
A debit note is the opposite adjustment: it increases the amount owed on an earlier invoice. A seller might issue one after undercharging, forgetting an agreed extra such as shipping, or when a price adjustment allowed by the contract applies.
The term is used in two ways, which causes real confusion. In many businesses, the seller issues a debit note to raise the amount due. In others, a buyer sends a "debit note" to a supplier to ask for a credit, for example when returning goods. Both usages are common. If a customer or supplier sends you one, check which kind it is before you record it.
Credit note vs debit note: side by side
| Credit note | Debit note | |
|---|---|---|
| Effect on amount owed | Decreases it | Increases it |
| Usually issued by | The seller | The seller (sometimes the buyer, see above) |
| Typical reasons | Returns, overcharges, post-sale discounts, cancellations | Undercharges, omitted charges, agreed price increases |
| References | The original invoice number | The original invoice number |
| Effect on the seller's revenue | Reduces it | Increases it |
| Effect on receivables | Reduces what the customer owes | Increases what the customer owes |
A worked example
A supplier invoices a shop for 12 lamps at $200 each: $2,400 on invoice INV-0381. Two lamps arrive broken and are sent back.
The supplier issues credit note CN-0027 for 2 × $200 = $400, referencing INV-0381. The shop now owes $2,000. If the original invoice had also charged tax, for example 20% VAT or GST, the credit note would reverse the tax on the returned lamps too: $400 plus $80 of tax, $480 in total.
Later, the supplier realises the agreed $150 delivery charge was never billed. It issues debit note DN-0009 for $150 against the same invoice. The three documents together tell the full story: $2,400 invoiced, $400 credited, $150 added, $2,150 due before tax.
Credit note vs refund vs write-off
Three different things are often described as "crediting" a customer:
| Credit note | Refund | Bad-debt write-off | |
|---|---|---|---|
| What it is | A document reducing what's owed on an invoice | Money paid back to the customer | An internal decision that a debt won't be collected |
| Customer involved? | Yes, they receive it | Yes, they receive money | Usually not |
| Why it happens | The original charge was too high or goods came back | The customer had already paid, and is owed money back | The customer can't or won't pay |
| Effect on sales | Reduces them | None by itself (the credit note did that) | Usually recorded as an expense, not a sales reduction |
The distinction matters for your records. A write-off isn't a credit note: the original sale was valid, the customer just didn't pay. How write-offs are recorded, and whether they affect tax, depends on your accounting framework and local rules.
What should a credit or debit note include?
- A clear title: "Credit note" or "Debit note".
- Its own unique, sequential number.
- Date of issue.
- Seller and customer details, matching the original invoice.
- The original invoice number and date it adjusts.
- What is being adjusted and why: items, quantities, prices.
- The amount of the adjustment, and any tax adjusted with it.
- What happens next: amount now due, refund, or credit held on account.
Much of this mirrors a normal invoice. The invoice fields checklist is a useful starting point, and how to create a professional invoice covers numbering habits that make adjustments easy to trace.
How do you apply a credit to a customer's account?
Once a credit note is issued, decide with the customer what happens to the credit:
- Invoice still unpaid: the customer pays the original amount minus the credit.
- Invoice already paid: refund the credit, or hold it and deduct it from their next invoice.
- Several open invoices: state which invoice the credit applies to, so both sides' records agree.
Whatever you agree, show it on the customer's statement of account, so the balance they see matches the one you're chasing.
How do credit notes work with VAT, GST and sales tax?
Where the original invoice charged tax, an adjustment usually has to adjust the tax too. The rules depend on the country:
- VAT systems (for example the EU and UK). The EU VAT Directive treats a document that amends and specifically refers to an original invoice as an invoice in its own right, so a credit note typically needs to meet invoicing requirements. UK VAT-registered businesses should follow HMRC's guidance on credit and debit notes.
- GST systems. Countries with GST, such as Australia, Canada and India, each set their own rules on adjustment documents and how they're reported. In India, for instance, GST credit and debit notes are reported in the supplier's returns (see GSTR-1 vs GSTR-3B).
- Sales tax (for example the US). Sales tax is generally set at state and local level, and treatment of returns and post-sale discounts varies by jurisdiction.
Time limits and required wording differ between systems, so businesses should verify the requirements where they are registered.
Common mistakes
- Editing a sent invoice. The customer already has the original. Changing your copy creates two versions of the truth.
- Issuing a new invoice without cancelling the old one. If a corrected invoice replaces a wrong one, credit the wrong one in full first, or the customer appears to owe both.
- Forgetting the tax. A credit note that reduces the price but not the tax leaves your tax records out of line with your sales.
- Not linking to the original. A credit note without an invoice reference is very hard to reconcile months later.
- Leaving credits unapplied. A credit sitting on a customer account with no refund or offset makes your receivables look wrong and frustrates the customer.